I know a lot of market participants have been looking for this break long before today. My sense has been that they are wrong and the market recovery in the six weeks through Friday can carry a long way, surprise everyone, and ruin the bears' year as the prices will be set by investors looking beyond the current recession earnings trough. At the moment, I am holding on to that view. But I can be persuaded that I am wrong, and switch my position accordingly.
Recently I have had correspondence with Professor Christopher Mayer of Columbia Business School, regarding his Mayer-Hubbard Plan and my Household Initiative Plan. He says he has been in Washington lately and senses a real loss of momentum for all these plans. I think you can generalize that. There has been a loss of momentum for all the administration's economic schemes as they have had other things on their plates such as foreign summitry, stem cells research, climate change, torture memos, and so on and so forth. Also, Congress has been on Easter recess. It may be a coincidence that the market took a swan dive on the day Congress returned and the administration held its first cabinet meeting. But on the other hand it may not -- market participants have ample cause for concern about the administration of the TARP, the independence of the Federal Reserve, the possibility that Ben Bernanke is not reappointed, and the dawning realization of the scale and scope of the budget deficit to come. And with government back in full domestic operation, players may be pricing that in, and the previous six weeks could turn out to have been a pleasant holiday from hard reality.
Showing posts with label Federal Reserve. Show all posts
Showing posts with label Federal Reserve. Show all posts
Monday, April 20, 2009
Saturday, February 21, 2009
Household Initiative Plan to Rescue Real Estate
Here's a new plan for America's housing problem called the Household Initiative Plan. It’s called that because of all the plans out there it is the only one that asks little of the Treasury, Federal Reserve, or other government agencies besides non-interference in what millions of responsible householders could do for themselves on their own initiative.
My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.
While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.
At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.
At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.
Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.
If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.
The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.
The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?
D.H. Smith, Mt. Freedom NJ, 2/16/2009
Cross-posted at Household Initiative Plan Blog
Glad to get your feedback at "the.grayling at gmail dot com"
My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.
While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.
At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.
At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.
Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.
If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.
The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.
The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?
D.H. Smith, Mt. Freedom NJ, 2/16/2009
Cross-posted at Household Initiative Plan Blog
Glad to get your feedback at "the.grayling at gmail dot com"
Thursday, February 19, 2009
Federal Open Mouth Policy is a Big Sell
The first time I realized that the Federal Open Mouth Policy is a Big Sell was over a year ago, when Fed Chief Ben Bernanke made some innocuous remarks about financial conditions that at that point did not yet rise to the level of panic. The stock market sold off hard.
Bear Stearns rescue -- short term relief, after which market sold off hard.
The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.
Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.
TARP, TALF . . . barf.
George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.
The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.
The Inauguration Address went over like a lead balloon. Big, big sell.
But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.
The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.
The finger was on the sell button, but we held back on pressing it.
It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.
The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.
So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.
Or maybe they will wait till later in the day. It's early yet.
While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.
UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.
MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.
Bear Stearns rescue -- short term relief, after which market sold off hard.
The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.
Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.
TARP, TALF . . . barf.
George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.
The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.
The Inauguration Address went over like a lead balloon. Big, big sell.
But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.
The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.
The finger was on the sell button, but we held back on pressing it.
It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.
The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.
So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.
Or maybe they will wait till later in the day. It's early yet.
While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.
UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.
MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.
Saturday, January 31, 2009
Banking for Smart People who aren't Bankers
Those "For Dummies" books and "Complete Idiots Guides" always rubbed me the wrong way. Who buys this stuff? "Hey, I'm a complete idiot, that's for me!" Uh-uh. You're smart and so am I. So let's talk about banking. I'd like you to understand, in simple terms, what's going on when they build a pyre of French antique commodes where Nassau runs into Broad at the corner of Wall Street and start burning bankers alive.
For the show trials they are a'comin. There is a lot of outrage that Uncle Sugar has provided bank capital and weeks later those damned banks are still not lending it. Well, let's examine that.
Basic banking is just a little more complicated than regular industrial enterprises. In a regular industrial enterprise the raw material is, say, habanero peppers and the end product after some processing is hot sauce. For a basic bank, the raw material is money and the end product, after no real processing, is also money.
So an investor -- you remember investors, right? they used to have money to invest -- an investor or investor group gets a bank charter, puts capital in to capitalize their bank, and opens for business. The bank charter allows the bank to take deposits and make loans. The bank loans its deposits. It does not loan its capital. Its capital sits in the vault.
That sets up popular misconception number 1: that having new capital from Uncle Sugar, banks should be lending it. No they shouldn't.
Banking regulations permit banks to lend out up to twelve times their capital.
What about deposits? Simple, plain vanilla banking is taking in deposits, and making loans. The bank pays as little interest as it can on deposits, and charges as much interest as it can on loans (plus points, fees, service charges, and whatever else it can get away with). The difference between interest and fees charged on loans and interest paid on deposits is profit.
The limit on the bank's lending is capital, not loans. If the bank wants to grow, that is to lend more, it needs more capital. A bank that lends less than its capital would permit is considered a conservative bank -- it has a capital surplus backstopping and its lending activities.
As for loans and deposits, the bank can lend out less than it takes in, the same amount as it takes in, or more than it takes in. If it lends out less to regular borrowers than it takes in from depositors, that excess doesn't sit in the vault. The bank buys bonds -- corporate bonds, government bonds, mortgage bonds, whatever. (A bond is just a loan in the form of a security.) If the bank wants to lend out more than it actually has from depositors, it can bid for deposits by raising the interest it pays, it may be able to borrow from the Federal Reserve, or it can borrow from other banks in a huge inter-bank market. Have you been hearing anxious talk about LIBOR, and not knowing what that is? LIBOR is the London Inter-Bank Offer Rate, a rate at which banks commonly lend to each other on a short-term basis.
Banking is a great business . . . you make a margin between what you give and what you receive. It is not a large margin as a percent of the loans and deposits, but because those are a multiple of capital, the returns on capital are large. Or they should be. But then there are losses.
Losses. Ugh. Banks expect that a small percentage of the loans they make to go bad. Some borrowers just get in trouble, some are crooks who never intended to pay back. In that case the bank forecloses on the house or repos the car, and takes what it can recover.
What the bank never expected was that so many of the mortgage bonds would go bad. Those bonds were supposed to be safe. Isn't that why Moody's and S&P put their great triple-A ratings on them?
So the bank looks at its loans and its bonds, and instead of a profitable portfolio it has bad loans, loans in collection, real estate on its own books losing value while no one maintains it and lawyers fight over it, and triple-A rated mortgage bonds in default. These losses are reported on the Profit and Loss Statement, and also charged against capital on the Balance Sheet.
Capital. You remember capital. Capital limits the loans that the bank can make. If the bank loses capital, it loses lending capacity. It can lend less to borrowers. Loan limits get cut. Lines get called, or not renewed.
When you multiply this effect by ten thousand banks across the national economy, you get a liquidity crunch and the economy judders to crawl almost immediately. You probably remember when it happened this time around: it was right around the day when Lehman Brothers went belly-up and we all realized how bad things were. We held our wallets closer, and stopped opening them for discretionary purchases. The economic motor slowed as if its power cord were yanked from the wall socket.
Banks can lend less, but with individuals and businesses cleaving tightly to their wallets, borrowers want to borrow even less. This answers popular misconception number 2: with new capital from Uncle Sugar, banks' capital is not constraining lending and liquidity should immediately re-form in loan markets. No it shouldn't. At this point the problem is not so much supply of loans. It is demand for loans.
With the economy slow and uncertain, everyone pulls back. If unemployment is rising, jobs are scarce, pay raises are hard to come by (and bonuses are made illegal by Acts of Congress), it is absolutely rational behavior for consumers to cut back on their use of credit. If business opportunities are thin on the ground and companies lack confidence, it is absolutely rational for business owners to hunker down, defer capital projects and try to cut back their demand for working capital.
There are some complications that I haven't got into here. I have tipped my hat to the ratings agencies, who have screwed up big time. I believe the standards-setting organizations for accounting and auditing have made this situation worse than it it needs to be by forcing banks to recognize losses too early on loans that can be worked out, crushing their capital. I have not talked about the Federal Reserve, the operations of which influence the price and availability of money.
What is the cure? I just alluded to part of the cure, it is that which cures all ills -- time. Given time, banks can work out of losses on many bad assets. Given time, individuals and business owners will regain confidence and begin to demand loans again.
Next, price. The Federal Reserve has hooked up the economy the a veritable firehose of liquidity and reduced the price to about zero. That lets banks cut their lending rates to levels that bring back prospective borrowers and yet still allows them to make a great margin.
Also, money. Banks are being recapitalized as the leaders of the industry and government figure out how to deal with the upsurge in bad loans. It is not only government money coming in to recapitalize banks, but also private capital that banks call upon from those that still have it. This also takes time (see above).
Hang in there. It gets better.
For the show trials they are a'comin. There is a lot of outrage that Uncle Sugar has provided bank capital and weeks later those damned banks are still not lending it. Well, let's examine that.
Basic banking is just a little more complicated than regular industrial enterprises. In a regular industrial enterprise the raw material is, say, habanero peppers and the end product after some processing is hot sauce. For a basic bank, the raw material is money and the end product, after no real processing, is also money.
So an investor -- you remember investors, right? they used to have money to invest -- an investor or investor group gets a bank charter, puts capital in to capitalize their bank, and opens for business. The bank charter allows the bank to take deposits and make loans. The bank loans its deposits. It does not loan its capital. Its capital sits in the vault.
That sets up popular misconception number 1: that having new capital from Uncle Sugar, banks should be lending it. No they shouldn't.
Banking regulations permit banks to lend out up to twelve times their capital.
What about deposits? Simple, plain vanilla banking is taking in deposits, and making loans. The bank pays as little interest as it can on deposits, and charges as much interest as it can on loans (plus points, fees, service charges, and whatever else it can get away with). The difference between interest and fees charged on loans and interest paid on deposits is profit.
The limit on the bank's lending is capital, not loans. If the bank wants to grow, that is to lend more, it needs more capital. A bank that lends less than its capital would permit is considered a conservative bank -- it has a capital surplus backstopping and its lending activities.
As for loans and deposits, the bank can lend out less than it takes in, the same amount as it takes in, or more than it takes in. If it lends out less to regular borrowers than it takes in from depositors, that excess doesn't sit in the vault. The bank buys bonds -- corporate bonds, government bonds, mortgage bonds, whatever. (A bond is just a loan in the form of a security.) If the bank wants to lend out more than it actually has from depositors, it can bid for deposits by raising the interest it pays, it may be able to borrow from the Federal Reserve, or it can borrow from other banks in a huge inter-bank market. Have you been hearing anxious talk about LIBOR, and not knowing what that is? LIBOR is the London Inter-Bank Offer Rate, a rate at which banks commonly lend to each other on a short-term basis.
Banking is a great business . . . you make a margin between what you give and what you receive. It is not a large margin as a percent of the loans and deposits, but because those are a multiple of capital, the returns on capital are large. Or they should be. But then there are losses.
Losses. Ugh. Banks expect that a small percentage of the loans they make to go bad. Some borrowers just get in trouble, some are crooks who never intended to pay back. In that case the bank forecloses on the house or repos the car, and takes what it can recover.
What the bank never expected was that so many of the mortgage bonds would go bad. Those bonds were supposed to be safe. Isn't that why Moody's and S&P put their great triple-A ratings on them?
So the bank looks at its loans and its bonds, and instead of a profitable portfolio it has bad loans, loans in collection, real estate on its own books losing value while no one maintains it and lawyers fight over it, and triple-A rated mortgage bonds in default. These losses are reported on the Profit and Loss Statement, and also charged against capital on the Balance Sheet.
Capital. You remember capital. Capital limits the loans that the bank can make. If the bank loses capital, it loses lending capacity. It can lend less to borrowers. Loan limits get cut. Lines get called, or not renewed.
When you multiply this effect by ten thousand banks across the national economy, you get a liquidity crunch and the economy judders to crawl almost immediately. You probably remember when it happened this time around: it was right around the day when Lehman Brothers went belly-up and we all realized how bad things were. We held our wallets closer, and stopped opening them for discretionary purchases. The economic motor slowed as if its power cord were yanked from the wall socket.
Banks can lend less, but with individuals and businesses cleaving tightly to their wallets, borrowers want to borrow even less. This answers popular misconception number 2: with new capital from Uncle Sugar, banks' capital is not constraining lending and liquidity should immediately re-form in loan markets. No it shouldn't. At this point the problem is not so much supply of loans. It is demand for loans.
With the economy slow and uncertain, everyone pulls back. If unemployment is rising, jobs are scarce, pay raises are hard to come by (and bonuses are made illegal by Acts of Congress), it is absolutely rational behavior for consumers to cut back on their use of credit. If business opportunities are thin on the ground and companies lack confidence, it is absolutely rational for business owners to hunker down, defer capital projects and try to cut back their demand for working capital.
There are some complications that I haven't got into here. I have tipped my hat to the ratings agencies, who have screwed up big time. I believe the standards-setting organizations for accounting and auditing have made this situation worse than it it needs to be by forcing banks to recognize losses too early on loans that can be worked out, crushing their capital. I have not talked about the Federal Reserve, the operations of which influence the price and availability of money.
What is the cure? I just alluded to part of the cure, it is that which cures all ills -- time. Given time, banks can work out of losses on many bad assets. Given time, individuals and business owners will regain confidence and begin to demand loans again.
Next, price. The Federal Reserve has hooked up the economy the a veritable firehose of liquidity and reduced the price to about zero. That lets banks cut their lending rates to levels that bring back prospective borrowers and yet still allows them to make a great margin.
Also, money. Banks are being recapitalized as the leaders of the industry and government figure out how to deal with the upsurge in bad loans. It is not only government money coming in to recapitalize banks, but also private capital that banks call upon from those that still have it. This also takes time (see above).
Hang in there. It gets better.
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