My Stupid Stimulus Bill - What's wrong with it?

[Meadmaker]

No. The problem is

c) the people they would normally loan to, who (demonstrably) can pay them back, are not being loaned to because the banks are unwilling to take the risk that they will not be paid back.

I don't see why you're so quick to agree that the banks have systematically underestimated the risk, but you insist that now they are accurately estimating the risk instead of systematically overestimating it.

Because it's irrational behavior for banks. If they don't loan money, they aren't banks anymore. If people can demonstrably pay back the loans, then those are zero risk investments. If any bank lends to those people, their reserves would quickly drop to the minimum required value, because your analysis suggests that there are hordes of low risk borrowers who would pay a substantial premium to borrow, above what someone could get by lending to the government. A banker would have to be a fool to pass it up, and they would lend all their available cash. Are they that stupid?

You might be tempted to say that I must think they are, because they botched it so badly last year, by lending to people who couldn't afford it. However, the people who made the loans actually made money hand over fist doing it. They were more than happy to make all sorts of loans, and not fret too much about who could pay it back. The bank investors are another story, but the actual people who signed the loan papers made out pretty well.

(You'll note that the yield is no longer negative, in part because there are now more securities available, so the price has gone down and the yield up.)

How long did those negative yields last? Wasn't it, literally, minutes?

ETA: Looked it up, and the answer is yes, and only on the secondary market, although some short term (four week) T-Bills were sold at 0% in a government auction.

 

[drkitten]

Because it's irrational behavior for banks.

So? Banks do irrational things. You already accepted that they had irrationally lowballed the risk; why is it then beyond conception that they might be highballing the risk now?

If they don't loan money, they aren't banks anymore.

Nonsense. That's like saying if I'm not selling a car right now (at 2am), I'm not a car dealership any more.

A banker would have to be a fool to pass it up, and they would lend all their available cash. Are they that stupid?

Yes.

How long did those negative yields last? Wasn't it, literally, minutes?

Yes, it was literally minutes. But people were still willing to pay capital for a risk-free investment, and a number of other people have been willing forego all income for a risk-free investment, ... and a much larger group of people have been buying Treasury obligations that deliver, by historical standards, a purely nominal return.

For further examples, look at today's New York Times (sorry, can't post the link); banks are finally (probably at least partly in light of Citigroup's recent menu) realized that they're overreacting. There was also a lengthy article by a number of major investors, including Buffett, pointing out that the market value of the "toxic securities" is so low that they're actually good "value" investments at this point .

And,, further to above, the interest point spread right now is huge, reflecting the fact that the government is making low-interest loans available to the banks, but there is a huge demand for consumer credit that is not being met.

In other words, as you put it, "your analysis suggests that there are hordes of low risk borrowers who would pay a substantial premium to borrow, above what someone could get by lending to the government." The interest spreads demonstrate this. What "my analysis suggests" is actually true, as measured by the cold, hard numbers. So, you're right, a bank would be foolish to pass this up, and Buffett (among others) are pointing out that the banks are behaving foolishly.

Or, in short, yes, they are that stupid.

 

[Meadmaker]

So? Banks do irrational things. You already accepted that they had irrationally lowballed the risk; why is it then beyond conception that they might be highballing the risk now?

Because back when they were lowballing the risk, the people (as opposed to the institutions) that lowballed the risk got rich.

It's easy to tolerate a little bit of cognitive dissonance when the consequences of doing so are buying a BMW. "Hmmmm....I'm not sure if this guy will pay my company back in five years, but I do get a commission for closing this loan. Should I trust him?" vs. "Sure, my bonus is based on the volume of loans I generate, but I have to put the company first. I just can't in good conscience take that commission unless I'm absolutely sure it's a good deal for the stockholders."

Of course, it could be that what happened is executives and high level managers were told that risky behavior would get them fired this time around, and so they wrote overly restrictive policies for their underlings, tying their hands on risk taking. That, I suppose I could believe.

Nonsense. That's like saying if I'm not selling a car right now (at 2am), I'm not a car dealership any more.

It's more like saying that if I close my dealership for three months and the guy across the street keeps his open, I'm not a car dealership anymore.

but there is a huge demand for consumer credit that is not being met.

There is indeed a huge demand for consumer credit that isn't being met, but I'm not sure which point that proves. People, despite being in debt up to their eyeballs, want to borrow more.

 

[drkitten]

Because back when they were lowballing the risk, the people (as opposed to the institutions) that lowballed the risk got rich.

And, similarly, high-balling the risk makes the people running the institutions rich. Large cash reserves today means a healthy balance sheet this quarter at the expense of future earnings.

There is indeed a huge demand for consumer credit that isn't being met, but I'm not sure which point that proves.

It proves that there's a demand that's not being met, which in turn proves that bankers are not meeting that demand.

q.e.d.

 

[mhaze]

Exactly. However, in fact, it even stimulates the economy in the short term. That money in savings accounts is what is lent out. I saw it in "It's a Wonderful Life" so it must be true. My money is in John's house and Fred's house, and Bob's wide screen TV...etc. If I hadn't saved that money, they couldn't have borrowed the money for their stuff.

The money doesn't vanish just because I save it. Also, if I use it to pay down debt, that's a good thing. Banks have to keep a certain amount of reserves. Once they've lent out all the money they can, they can't lend more until someone pays some of it back. Me paying back my debt allows the bank to lend it to someone else.

If anyone really thinks that the problem is finding a way to get people to spend money, then by all means enact the Stupid Stimulus Plan. If not, could you show me how your stimulus plan is better than the Stupid plan?

What is wrong with your plan is that it tries to take us back to where we were, not to either where weshould or are going to. Aspects of those are definable, aren't they?

 

[Beerina]

My position is that there's plenty of Stupid in the world already. It doesn't need stimulating.

Since it's all going in cycles anyway, Bush heaves out a trillion to try to take the inevitable recovery thunder from Obama, but no! The big O isn't gonna be cut out of that, so off goes another trillion from him.

It would serve 'em both right if the economy did melt down now.

 

[mhaze]

Since it's all going in cycles anyway, Bush heaves out a trillion to try to take the inevitable recovery thunder from Obama, but no! The big O isn't gonna be cut out of that, so off goes another trillion from him.

It would serve 'em both right if the economy did melt down now.

what IS stimulated Stupid? Like Stoopid^3?

 

[TjW]

My position is that there's plenty of Stupid in the world already. It doesn't need stimulating.

Since it's all going in cycles anyway, Bush heaves out a trillion to try to take the inevitable recovery thunder from Obama, but no! The big O isn't gonna be cut out of that, so off goes another trillion from him.

It would serve 'em both right if the economy did melt down now.

It's always seemed to me that Stupid has been fairly constant. But maybe I wasn't measuring it correctly.