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"Why is it so hard for everyone to see this?"

Because it obviously can't be captured in a soundbyte.

Deposits are down compared to when?

Last August, checkable deposits were $600 billion and now they are nearly $800 billion.

Savings accounts were $4 trillion and now they are about $4.1 trillion.

Large time deposits at commercial banks fell from $2131 billion to $1983 billion.

And small time deposits went from $1242 bilion to $1369b.

It looks to me like bank deposits are larger, though there has been a move from large (uninsured?) to small time deposits, as well as to savings accounts and especially, checking accounts. To me, that fits in with a notion that extra uncertainly is leading to a wait-and-see approach, and so funds are in checking accounts--waiting.

Bank reserves are very high. Banks are "holding" money and not lending it. Of course, they are earning interest on those reserves now, but ignoring the insanity (or dishonesty) of complaining about too little bank lending while paying banks not to lend, it would fit into a wait and see attitude by banks too.

Banks are clearly not reserve constrained. Reserves were more than 100% of "transactions" balances last I looked.

They aren't deposit constrained either.

There is a theory that they are capital constrained. Banks are required by law to fund assets by 10% with equity funds. Past losses reduced bank net worth. They can only build it up through earnings or by issuing more stock to someone.

I think part of the problem is that at least some banks are meeting these capital requirements through dishonest accounting. While they are earning on current operations, no one wants to buy stock in an insitution that is going to write down more bad loans. (Well, maybe they would under certain circumstances, but it obvious why selling new shares is difficult.)

Government capital injections just allows the banks to tell less extravagent lies. The injections allow them to write down losses and not reduce lending as much as the regulations require.

The rumour in the banking industry is that Franks may demand more lending, but the "on the ground" bank examiners are insisting on write downs that reduce capital and reduced lending to meet regulatory capital ratios.

Do the chiefs not know what the indians are doing? Or are they lying.

When it is combined with paying banks not to lend, by paying interest on reserves, while hectoring banks to lend more, the "lying" story is a bit more plausible.

But, maybe they are just stupid. Or perhaps it is just me.

http://delong.typepad.com/sdj/2009/02/refuted-economic-doctrines-1-5.html

Someone please respond to Delong's approving post of the above nonsense in a proper post.


Bill,

Excellent points. But I think we dovetail in our understanding when you emphasize that the funds are going for purposes of allowing the banks to write down losses. And I also like your point about paying banks to not lend. It is all about the rules of the game under which the economic actors are playing, and the rules right now reinforce (not break) the uncertainty of the economic future.

Tushar,

The "refuted economic doctrines" come from another blogger, but DeLong would likely endorse them. I think that many of the claims are quite sweeping and require for a "proper" response something well beyond "blogoshere" talk, but serious economic analysis of the meaning of the efficient market hypothesis, the case for privatization, etc. I bet right now there are some very smart economist working precisely on these topics, but not necessarily in blog-speak.

"But, it is the Keynesian policy responses that have been pursued which are preventing private actors from making the correct adjustments to the new economic realities and thus bring into alignment saving and investment in a prudent and productive manner."

In a world where the actors can't force their governments into or out of any policy, what are the actors left to do? Similarly, what should countries committed to free trade do when all of their partners erect trade barriers? In the end, governments will eventually remove the barriers, but in the meantime the market is distorted. How should the actors take government interference into consideration (retaliate, taking advantage, ignore, etc.)?

(Peter -- feel free to take this offline and shoot me an e-mail if this is wandering OT.)

Mr Boetkke,

Thanks for your response. I understand what you mean. However, Delong, Krugman and Thoma are clearly on a propaganda campaign. Because of the political situation, they sense this is the time to ram through all of their ideological talking points into the public sphere unopposed and as self-evidently correct (cos umm..bush..DEREGULATION!). You said that we cannot and we will not, this time let myths go unchallenged unlike in the 30s. I call upon all econ bloggers favorable to liberty with a decent audience to heed this call, please!

tushar,

Remarkably, these ideas WERE challenged in the 1930's. At our library here at Notre Dame I went to the stacks to get Rothbard's "America's Great Depression" and there were tons of books published c.1930-33 decrying Hoover, FDR and that fascist load of hanky-panky affectionately known as the "New Deal." Interestingly, many of the arguments, though not specifically Austrian, echo the arguments Rothbard would make in the 1960's.

Nonetheless, let's continue to challenge the Stimulators. Maybe we'll have more luck this time.

I'm a little late, but I'd like to second Bill Woolsey's points. One series he didn't mention is "Total savings deposits at commercial banks". As of 2009-01-19, that figure is at its highest level ever ($4217.5b). Source: http://research.stlouisfed.org/fred2/series/WSAVNS?cid=29. The Fed can always make deposits grow if it tries hard enough, and it is currently trying VERY hard: the monetary base is up 50% in the last 13 weeks (!!). M1 and M2 have both grown at double-digit annualized rates over the last 13 weeks.

The big banks are getting special treatment. In fact Paulson -- with the aid of some fellow named Geithner -- pressured the nine largest banks to let the government take an equity position in each bank.
(http://www.nytimes.com/2008/10/15/business/economy/15bailout.html?_r=1&pagewanted=all) Now we see Obama deciding what is a fair salary for a banking exec (albeit *not* retroactively). Maybe we need to consider measures to keep banks small? I know such controls are generally to be eschewed, but until we find a way to repeal too-big-to-fail, perhaps we should view some such measure(s) as our least-worst makeshift in an imperfect world.

I may be mistaken but I thought the problem was primarily with the banks´ asset side of the balance sheet not with the liability side where the deposits are. These toxic assets as they are called make it difficult to evaluate the net worth of banks and this increases uncertainty. This kind of risk is normally borne by shareholders, and it is not clear why the government should protect shareholders with taxpayers´ money, either by recapitalization or by buying up the toxic assets. But I am not sure recapitalization aims at encouraging investments, it´s only a matter of making sure net worth is sufficient given those write-offs on assets. Would anyone contest that?
But the decision - whether to recapitalize or to let the bank go bankrupt - should be left to shareholders.
Now if the net worth becomes insufficient this might keep away depositors too but I am not sure whether empirically this is the case.

It is a fallacy that banks are lenders. They are borrowers by definition at approximately 7:1 debt to equity ratio. The governments debt ratio is even higher.

At the end of the day, the whole Capitalist System works on borrowed time derived from scarce and proportionate land and labor resources. Such a land-based system must inevitably be converted to a system based on the infinite utility value of air, water and light and human innovation.

You ask "Why is it so hard for everyone to see this?" Economic evolution is just that, for the only way to learn is to experience. The opportunity that is ahead of us is great. Schumpeter writes about a current entrepreneurial system operating alongside the monopolies and bureaucrats that is just gaining more strength as the Capitalistic system buys the soon to be Pluralistic system a little more time.

Why is it a fallacy that banks lend? I only said that it is a fallacy that recapitalization aims - or should aim - at making banks invest. What will make banks invest is interesting investment opportunities, i.e. opportunities that offer returns in excess of their weighted average cost of capital, taking into account relevant risks (or better: uncertainty). Uncertainty seems to be part of the problem today. But as far as depositors are concerned, if you recapitalize banks sufficiently, and the money is held, say, as cash reserve, this would solve _their_ problem.

Not on topic, but may be of interest to football watchers. A couple of neat catches in two different codes. http://blogs.news.com.au/dailytelegraph/timblair/index.php/dailytelegraph/comments/catch_contrast/

Just for background, in the Australian game practically all yardage and all scores are made with kicks. There is no scrum down and no offside, possession after stoppages is decided like basketball and the players line up one on one. Given that all the top players can punt the ball prodigious distances it is surprising that only a handful of Australians have been recruited into gridiron.

Rafe is right. Those who do not understand finance can still watch football.

Doug:
Note that even a 7:1 debt-equity ratio is probably to some substantial degree induced by government regulations like deposit insurance, lender of last resort etc. Capital adequacy regulation is no solution, however.

Hay diferentes tipos de activos que se pueden clasificar según su grado de liquidez respecto al Dinero. Por ejemplo, las cantidades de las cuentas bancarias (depósitos a la vista) son considerados como dinero bancario que se puede convertir en dinero legal, en una relación de 1:1, de forma inmediata, es decir, cuando hacemos un depósito en efectivo en una cuenta corriente, éste se convierte en dinero bancario, que viene de hacer una simple anotación contable en el pasivo (obligaciones o deudas) del banco, donde se indica que el banco debe esa cantidad de dinero al depositante, y además, existe el compromiso (contrato) por parte del banco de convertir el dinero bancario (deuda) en dinero legal (efectivo) de forma inmediata si el cliente así lo solicita. Desde el punto de vista del cliente, lo que tiene es un activo en forma de deuda (dinero bancario) con un alto grado de liquidez ya que existe el compromiso por parte del banco de que siempre lo puede convertir en dinero legal. Con el dinero legal depositado por el cliente, el banco hace su negocio, prestando parte mediante créditos a otros clientes, comprando bonos o acciones, etc..., pero debe mantener reservado otra parte (reserva legal y la propia) para poder hacer frente a los reintegros de los clientes u otros compromisos de pago.

Government must not get involved, must not interfere in the work of banks. They will find the solution to the situation on their own.

The capital backing the banks' assets was just $1.4 trillion (last fall), leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private-sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to bring back the capital of banks to the level it had before the crisis, and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector.

U.S. banking system is effectively insolvent in the aggregate; most of the U.K. banking system looks insolvent, too, and many other banks in continental Europe are also insolvent.

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