Monday, January 5, 2009
Banks’ ‘Catatonic Fear’ Means Consumers Don’t Get TARP Relief
Some banks may have needed more capital but most did not need the Treasury's infusions in order to lend. In fact, all the big banks--Citi, JP Morgan, Bank of America, Wells Fargo--were pretty much forced by the Treasury to take the money. Yet before the, "We're gonna make you an offer you can't refuse," action by the government, lending was not being constrained by an insufficiency of capital.
Rather, lending was and is being hampered by a weak economy, severe job losses and declining asset values.
Those are not things that will be fixed by giving fresh capital to banks. Nor will lending resume in earnest just because interest rates are historically low.
The key is to stimulate demand in the economy and the only way to do that now is via fiscal measures. The government must spend or give money to households and businesses--either directly or thru tax cuts--in order to prime the pump and get the economy moving again. Only then will credit begin to flow anew.