Dollars and Nonsense

"The Credit Crunch..." banks refusing to lend money. The Banks will give all kinds of reasons for this, none of which make sense or matters to the common person. The Government, they think if they throw BILLIONS of dollars at the banks, nationalize Citibank, and increase regulation, the banks will open up the vaults and start lending money again. Nothing could be further from the truth.

The Fed (Federal Reserve) currently lends money to banks at 0.25% interest. Theoretically, the banks should turn around and lend that money to companies and consumers at a higher rate and with their profit being the arbitrage. Sounds good, but the banks aren't doing that. They're investing in bonds and making money on the arbitrage between the bond rate and their cost of funds! Simply, they are afraid to lend money because if they make a mistake or their core capital goes too low the FDIC will beat them with that giant federal stick! They are terrified of the regulation!

Ok, here it is... listen-up Geithner, that is if the sucking sound of TRILLIONS going down the drain at the Treasury isn't deafening. Here's how to get the banks making GOOD LOANS again without spending another dime of taxpayer money:

1. Repeal the mark to market rules. In an environment where the value of the banks assets may be decreasing daily this forces banks to act contrary to smart business practices. Banks forclose on perfoming loans because the value of the underlying asset has decreased. Banks are forced to take reserves (cash) and put it aside for under-collateralized loans. All of this affects the capital of the banks and causes the FDIC to swing their big stick again and tell the banks that they can't lend because their Capital has dropped below acceptable levels. It's a vicious circle that can be avoided. This recession is a temporary situation. The values uf the assets will recover if given adequate time. Forcing banks to take action at the bottom of the maket is exacerbating the recession and temporary problems at financial institutions.

2. The FDIC needs to temporarily lower Core Capital requirements for banks. Although this sounds dangerous on the surface, it really is very misleading. When banks put loans on non-accrual status it affects their capital negatively. The bank will NOT lose the full amount of the loan and if they are not forced by the FDIC to take immediate action, they may recover a majority of their loan amount, subsequently increasing capital. Give the banks flexibilty to do what they, NOT THE GOVERNMENT, do best, make loans.

Regulation, TARP Funds, Nationalization... it's all dollars and nonsense