The Banker's Depression
It’s funny that today Lawrence Kudlow wrote a blog post (Tough GOPers Stand Up to Geithner; All GOPers Should Counter Keynesian Stimulus ) on the need to oppose Keynesian stimulus just as more news came out showing that bankers are playing a game of chicken with the the pro-Keynesians. The new housing starts report today showed that builders are doing exactly what they should – cutting new production 50% year-to-year in the face of falling prices, an inventory glut and bankers refusing to roll over construction loans to solid builders. Consumers are doing exactly what’s been asked of them – new applications for home purchase mortgages rose again despite the continuing chorus of doomsayers.
Meanwhile, bankers are just sitting on a pile of new money – the Federal Reserve has printed and put in bank reserves $238 billion new dollars in the last 12 months. That’s a massive 15% increase in the monetary base (M1 for the technically minded). But bankers aren’t lending it. Ditech reports:
Fall out for refinance applications are estimated at 50% to 65%, because of low appraisals and qualifying issues. The new Fannie Mae and Freddie Mac appraisal code may contribute to more fall out, as well as FHA’s 2 appraisal requirement for cash out refinancing over 85%.
The neoclassical and supply side arguments against Keynesian stimulus hinge largely on the idea that saving isn’t actually removed from the economy as Keynes posited, but is actually invested – in stocks, bonds or bank accounts. And that money deposited in bank accounts isn’t a leakage, because banks will lend it. Except they aren’t.
Monetarists contend that Keynesian fiscal stimulus just isn’t as effective as monetary stimulus. They generally lean toward the conservative, free market view when it comes to what fiscal stimulus might be acceptable that, to paraphrase Milton Friedman, any tax cut is a good tax cut. But we’ve had some $600 billion of monetary stimulus between the Fed action and the TARP and it’s not being lent, putting the lie to monetarism as well.
To all outward appearances, money invested in bank accounts in this environment, whether by a newly positive personal savings rate or by a massive monetary stimulus, is a classical Keynesian leakage.
I agree with Kudlow that what we really need are supply side incentives to bring back real investment; unfortunately the actions of the big bankers are putting more ammunition behind the Keynesian argument and making sensible folks sound like the lunatic fringe as evidence mounts against us.
The small consolation is that the bankers will pay for this as much as anyone, as a slower economy with massively increased money supply means more of the loans they hold will go bad AND those paid back will be paid back with depreciated dollars. This economic event may deserve the title The Banker’s Depression – created by bankers, compounded by bankers and abetted by the bankers’ political cronyism even as the parts of the American economy that produce more than bookkeeping entries are more productive than ever.