Op-Ed: A few hundred billion later: Where’s all that money gone?

The new synonym for ‘destructive, useless and expensive’ is banks. After all the bailouts, all the desperate saving of financial institutions, and all the grief of the housing and investment markets, the banks are doing nothing.

Instead of lending, they’re now making things much worse by foreclosing on healthy businesses. There's a potentially very nasty subtext behind this situation. The theory is that banks generate business by financing. The fact is that in the last few months, banks have been destroying businesses, literally wiping out huge parts of the economy, and trashing asset values in the process. A pyromaniac with a flamethrower could take lessons from the credit policies: Ø Banks are demanding massive increases in collateral, wiping out solvent businesses that can’t produce that collateral. Ø The arbitrary policy based destruction of credit ratings will affect potential borrowers for years to come, assuming anyone condescends to lend in future. That will further suffocate business and personal finances, and help stagnate the domestic economy for a bit longer. Ø Venture capital credit, the driver of new business, is non existent, thanks to policy. Even major corporate borrowers can't borrow. The net effect on lenders of these putrid policies has been to kill their own major sources of revenue, housing, business, and personal loans. Industry analysts have pointed out that both worried shareholders and regulators are telling lenders to reduce exposure to the battered markets. Fine, but what are they supposed to do? Open hot dog stands? What is that money doing, if anything? Where is it doing it, and why? It'd be nice if major media asked these things, but let's not rush them into any sudden attacks of relevance or consciousness. There's been a monumental silence on the effect of the bailouts, so far. What's been achieved? Let’s get this straight: “Do nothing” is no longer an option, if it ever was one. That money, and the stimulus packages Mark 1, were supposed to kick start the domestic economy. The capital treadmill is slowing down instead, and it’s generating progressively less business the slower it gets. If it stalls completely, look out. Nor are the banks achieving much in whatever they or the Fed think they’re doing. That’s not exactly clear, either. Perhaps all of those billions are being put to good use, like foundation cream for Senate committee appearances, but other than that, there’s been no obvious business resulting. (That link above relates to a Bloomberg article by a guy called Michael R. Sesit, and it's well worth reading, because as you'll see, there are cures for shy banks, and they do work.) The big new buzz phrase is “toxic assets”, meaning loans, financial instruments, etc, which are effectively losses. Generally speaking all credit providers make provisions for bad debts, although the entire housing industry crashing probably wasn’t provided for. The usual story for bad loans, and other forms of toxic assets, is writedowns. There were very large writedowns at the start of the meltdown, and they were necessary to adjust asset values to reasonable market values. There seems, now, to be a great hesitancy about further writedowns. Even with all those billions to play with, the asset side of the balance sheets is obviously sensitive. Hence the great emphasis on collateral. This is potentially very dangerous. One possible effect of writing down assets is you wind up with a big imbalance on your balance sheet. The difference between solvency and insolvency is a figure, not a theory, and that’s what a sudden large imbalance means. My guess would be that the subtext to all these fanatical foreclosures, which don’t make much sense in terms of business logic, is a short term “fix the balance sheets” approach. I’d say they’re trying to write a nice fairy tale about asset values, and the extra collateral is being written in to provide some conceptual moisturizer, if not actual liquidity. The effects of this image consciousness, however, are particularly gruesome, from micro to macro. This is putting greasepaint on a skeleton, and it’s not working, in terms of market perceptions. I think we can say this is a case of the Peter Principle in full bloom. The industry is now completely out of its depth of competencies. The current banking system, which created the mess, was never trained for this scenario, and obviously isn’t handling any of the basics well. The score so far: Ideas: Nil Policies; -10 at least Planning: Nil Cost Effectiveness, pick any negative number There’s exactly one way out, and that’s get the damn bicycle moving again. Business doesn’t just happen, jobs don’t just happen, and revenue systems aren’t based on goodwill and cookies sales alone. The alternative is now looking very much like a real Depression.