Karl Denninger fairly poses the question of what is it going to take to get our credit markets going again. We both agree that is necesary for our economy to make a truly good recovery. I think there are two parts to the answer.
The initial part is we can start to get credit markets going if we can get GDP to grow a bit -- as seems likely-- incomes will rise a bit, savings to pay debt down further can stay about the same, and more money can then be spent on retail and household durables. That gives manufacturers incentive to expand production and with some delays (a) start hiring and (b) seek bank and other loans, after reducing excess capacity a bit, thereby helping to revive the credit markets. These events in turn can lead to more capital formation and greater private wealth down the road. It's a slow, painful process, but we can do it. However, there is a big remaining problem for credit markets and that is the second part of the answer.
It is the banks. Our banks are loaded down with debt and do not want to lend. Worse, the government has not done much useful to get that debt off their books, especially by letting them drop the mark to market rules and then drowning them in cash. Banks have used much of that cash to engage in risky trading operations. The goal, as ever, is to show large profits so sizeable salaries and bonuses can be justified and paid. However, those profits are really phony profits created by the relaxation of the mark to market rules for those banks. Absent that relaxation, banks would have had instead to use those profits, big salaries and large bonuses to plug the gaps on their balance sheets from debt being written down or off or sold for cents on the dollar to get it off their books.
We desperately need good financial regulation, reorganization and controls that, among other things, will allow the government to ease the mark to market rules back into place, encourage private partnerships to buy bad bank debt and force banks to use the money they now show as profits to repair their balance sheets instead. If various banks can't or won't do it or show a good plan to make progress along these lines, then those banks should be run through FDIC-like proceedings in an orderly way to reorganize them, to one extent or the other, to accomplish that result -- up to and including, if necessary, scraping off their debt, stockholders and management so as to sell them off as smaller, cleaned up banks to the private sector, perhaps with some helpful terms from the government. This is what clearly needs to happen. Savvy heads in Washington understand as much.
The problem again is the banks. They do not want financial regulation and restructuring. They like the present situation. The salaries and bonuses are great. They do not want their boats rocked. They do not want to do the work of lending. Unfortunately, the banks have serious lobbying capability in Congress to get what they want. The Senate Banking Committee, although Democrats are in the majority, is controlled by Republicans who have been bought off by the banking industry. They block virtually everything that needs to be done here. The Democrats are asleep at the wheel here and often do not even show up to vote. If it comes to that, our failure to get effective financial regulation and restructuring legislation will haunt us for years. It will become the blunder of this decade.
The blunder of the last decade was our failure to most effectively aid employment and rebuild our sagging infrastructure, thereby adding to our nation's wealth by increasing the worth of our durable public goods. We lost that opportunity because our effort in that regard was so feeble. We could have made the projects more labor intensive, streamlined and created exceptions to the laws that got in the way, simplified methods and have done a lot of what we did with the Work's Project Administration during the 1930's. It would have been a great stimulus program, with real tangible benefits and a good Keynesian multiplier. Instead we handed out a few tax cuts, doled out a lot of pork, and have held back much of the funding for a stimulus push before election time.
While it is probably too late for the infrastructure rebuilding program that could have usefully employed so many and done much useful good, it is not too late for good financial regulation and restructuring. The big banks should not be allowed to call the shots here. Congress needs to do its job and protect the public interest, instead of selling out to special interests, like the banking industry.
We have to get a handle on the big banks and force them to fix their problems before they will seriously lend again and they need to get back into the lending business before our credit markets can make a full recovery and really help our economy to get going. Unfortunately, the outlook here is grim, but we could change that if we had the collective understanding and will to do so.
Disclosure: none relevant