So if the government won't let banks fail, and also won't take them over, that means that Citibank, Bank of America, JP Morgan Chase and three or four others -- have us over a barrel. We can't just let them fail. And it's going to cost us one way or another to keep them alive. And this sucks. I feel that, you feel that, Congress definitely feels that.
Or at least their constituents are communicating those feelings to Congress. And this frustration leads to a lot of lashing out about almost exactly the wrong thing. Here's Massachusetts congressman Mike Capuano yelling at the banks:
"Start loaning the money we gave you! Get it onto the street!"
This might be a reasonable expectation for healthy banks, but for insolvent banks it can be a disaster, and the reasons all goes back to our balance sheet. You see, when a bank is insolvent, it doesn't have enough capital to cover its losses. So, in that situation, banks would actually be doing the RIGHT thing by keeping the bailout money that we're giving them -- not loaning it out. An insolvent bank needs to hold onto their capital because that's how they fix their balance sheets. If they loaned the money away, they'd be in danger of returning to the very situation we're trying to rescue them from. In other words, saving the banking system, means that the banks that are worst off, should loan less, not more. And that of course is precisely why they are all so reluctant to make loans.
But beyond the balance sheet, David Beim has a much more profound reason why banks shouldn't lend. Beim asks us to consider how much debt we the citizens of America, are really in. How much do we all owe -- on our mortgages and credit cards and auto loans, in total -- compared to the economy as a whole, the GDP. Keep in mind that throughout most of our history, the amount we owed was a lot smaller than the economy as a whole. The ratio of just household debt alone, to GDP, has always bounced around between 30 and 50 percent, for most of the 1930s, '40s , 50s, 60s, and 70s, right into the 80s. Then it breaks through 50 % in the mid 80s, starts heading up in the 1990s. And then from 2000 to 2008, it just goes, almost like a hockey stick, virtually straight upward. It quickly hits 100% of GDP. That is to say that, currently, consumers alone owe 13 trillion dollars -- when the GDP is $13 trillion!
Has there ever been a time where we owed that much before?
The earlier peak, which is way over on the left part of the chart, where debt is 100% of GDP, was in 1929. So this graph is kind of like a map of twin peaks. One in 1929 and one in 2007.
This chart is the most striking
piece of evidence we have that what is happening to us is something that goes
way beyond toxic assets in banks -- it's something that had little to do with
mortgage securitization, or ethics on Wall Street, or anything else. Basically it says the problem is us. The problem is not the banks, greedy though
they may be, overpaid though they may be.
The problem is us. We -- at least the top third of income receivers -- have
over-borrowed. We in the top third have been living very
high on the hog, mostly on borrowed money.
Our standard of living has been rising dramatically over the last 25
years, and the very large majority of us have been borrowing heavily to make
much of that prosperity happen. (Granted that most of the people in the bottom two-thirds of income receivers have borrowed out of necessity as their incomes and job prospects have shrunk.)
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