Sooner or Later

If you know and I know that sooner or later, the government is simply going to have to be more direct in getting the credit markets unfrozen, why isn’t the government doing that? The Treasury’s current plan of insuring against further falls in toxic bank assets probably isn’t going to cause much of a ripple in the desperate credit needs of struggling small and medium-sized businesses, let alone the behemoths that we read about every day in the headlines. And until those credit markets are unfrozen, the only new jobs we are likely to see are those directly created by the American Recovery and Reinvestment Plan… a program that will take years to begin to make a difference in the unemployment rate. Why don’t the government folks get it?!

Bottom line, and it isn’t going to be cheap, the government has to pour the money they want to see in the lending markets to save jobs directly into the lenders themselves. The remaining $350 billion of TARP money isn’t going to cut it; we probably need to start with two to three times that amount. And the longer we wait, the more money it is going to take to fix the system.

Steve Lohr writing for the February 13^th New York Times: “Meanwhile, the loss estimates keep mounting... Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Mr. Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion…‘The United States banking system is effectively insolvent,’ Mr. Roubini said.”

Others think the situation is critical but not as bad as Roubini assumes: “Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the United States banks have a capital shortage of $500 billion. ‘In a more severe recession, it will take $1 trillion or so to properly capitalize the banks, said Mr. Johnson, an economist at the Massachusetts Institute of Technology.” But even the IMF has raised its October 2008 estimate of expected U.S. losses from bad loans and failed securities from $1.4 trillion to a much nastier $2.2 trillion.

Japan had a nasty recession, resulting from its own burst real estate bubble in the late 1980s, that literally consumed the entire 1990s with failed infrastructure and other comparable stimulus packages, until the Japanese government finally (and successfully) intervened, in the early part of this decade, and provided the needed capital injections. Sweden saw the wisdom of such intervention in 1992 with positive results. Even the U.S., in the late 1980s, had to step in and save the failed savings and loan business (the “thrifts”) from their real estate excess by putting the nasty loans and sorry foreclosures into the government-controlled Resolution Trust Company before slowly releasing these assets back into the marketplace.

We need credit; banks don’t want to lend but are happy to take bad assets off their books any way they can. They are busy deleveraging, focusing on their survival and not the betterment of our economy in general.

I’m getting pretty fed up with the “indirect” approach; if you are going to spend taxpayer money to create a very necessary effect, particularly after a significant period of clear failure with the indirect approach, it’s time to bite the bullet and put the money you want in the credit markets directly into the distributors of money – the banks themselves – for the sole purpose of lending! If we do not unfreeze the credit markets, there is no way on heaven or earth to turn this economy around! I’m not triskaidekaphobic, and I am not writing this just because it’s Friday the 13^th!

I’m Peter Dekom, and I approve this message.