Thursday, January 28, 2010

Funny financing

I am quite puzzled by the following situation. The US Government lent money to banks at very low interest rate, through the easy monetary policy. This funding was meant to make it easy for the banks to lend to small businesses and get the economy moving. The banks took this money but were not keen to lend to small businesses (or the small businesses were not keen to invest in a weak economy). The banks decided to use the money to buy US Treasuries, i.e. they lend the money back to the Government and pocket the margin.

The US Government is now considering to lend the money directly to small businesses. What then, is the role of the banks?


C H Yak said...

Perhaps US banks should start all over again.

They should make money by "lending" not through "investment".

More "consumer / commercial" banking and less "investment" banking.

Parka said...

Those banks have not a shred of social responsibilities.

The government should set up their own bank, a savings bank.

Steve Wu said...

Regulation is an integral part of capitalism. Poor regulation (as we have seen) leads to poor behavior amongst the banks. In fact, there is empirical evidence to suggest the bigger the bank, the poorer the behavior. The statement applies to the Singapore situation as well.

The Obama administration is probably correct in the principles behind his banking reforms in terms of proper risk management and the final elimination of being "too big to fail". However, it clashes head-on with the special interests.

Since the present crisis was more of confidence, rather than liquidity, much of the US stimulus package was unused and was promptly returned because of the many "strings attached".

Ron Paul has been right all along. The Federal Reserve system is the source (rather than the solution) of many fiscal problems in the US and consequently, the world. The US stimulus package was financed by the Feds (with its secret group of shareholders), US Treasury and foreign sovereign investors (e.g. China, Japan and others), roughly one third per piece.

The semi-private Federal Reserve, acts as the de facto US Central Bank with regulatory powers to shape the fiscal landscape and at the same time, as an investor which stands to profit from every single crisis, e.g. war, financial debacle, etc. This is the ultimate conflict of interest.

The American taxpayers find themselves 2 trillion dollars poorer in the last round alone.

Anonymous said...

Hi Mr Tan,

Think you may find this interesting -- rap video of Keynesian economics versus Austrian economics. Quick econs lecture for the Gen Z too.

As for big banks not lending, it is no surprise. Many still have plenty of toxic stuff on their balance sheets and they took advantage of the QE policies to shore up the quality of their capital requirements. At the same time, they also took advantage to profit from unprecedented moves in financial mkts thru proprietary trading, dark pools, distressed investments, private equity etc.

Obama stated in his State of Union address to channel US$30bln of the big banks' repaid money to the smaller and regional banks, in the hope that this will enable easier lending to small businesses. Not sure how successful this will be, coz many smaller US banks have shaky CMBS securities on their books. They may follow the example of the big banks and use the funds to just strengthen their own balance sheets.

US govt may need to impose stick & carrot to get the smaller banks to lend. While many investors will not be happy with govt interference in the financial markets, but probably this will be more palatable than govt interfering with the big & global banking institutions.

Anonymous said...

Deplorable on the part of the banks;
but, stupidity on the US government.

Anonymous said...

Regulatory capture.

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