On my blog entry about Confidence, Sarah asked a great question in her comment. Sarah, if you don't mind, I'm going to paraphrase: Why is it a stupid idea to lend to banks like Bank of America and Citibank? If they go under, that's a lot of jobs lost.
Its true, Bank of America and Citibank are in trouble, much more so than they say, and could go under. And if they do, that's a ton more jobs that are lost, not just from the banks, but from companies that had their money in those banks.
I'm not nesecarily against the gov't paying these banks if it helps them to stay solvent. a) I'm not sure the gov't has enough money available to do this, and b) I'm not convinced its the best use of limited gov't funds.
First, lets assume that Bank of America and Citibank are actually salvagable. The US gov't spends several hundred billion dollars to save them. The reality is that, though they are now solvent again, they still have to lend significant amounts of money to stimulate the economy. This not only means that their balance sheets have to allow for this but that they must also take the time to process each loan. For the balance sheets to allow this, they must have enough capital on hand to cover the estimated loans that have defaulted and are going to default, plus extra to loan out. Then they must, over the course of time, loan out enough money to enough companies that it stimulates employers and consumers and the economy recovers.
Would it work? Eventually, yes. But it is a lot of money (no one knows exactly how much, because the banks won't value their bad loans at market value currently. If they did, it would be immediately apparent they are insolvent and they would be closed) and it is a significant amount of time. The gov't doesn't lend money quickly or all at once. Nor do I expect lenders to all apply at once for loans (though I could be dead wrong on that) And all that time that passes means more job loss and economic slump.
Honestly, its not a bad place to put our money, I just think its not the right place. I think its too risky to loan money to the banks to cover their loans, given that they could fail anyway, and that it'll take too long to work. So I feel the money is better spent on things that make us, as a country, feel more confident: social services, health care, and more jobs. I have heard people point out that those types of services are harder to cut after its all said and done, and people don't need them anymore. A valid point, but still, this is where I think the money will be better spent.
As for tax cuts, sure I appreciate them, but much more would be done for the economy if that money was used for a lot of new gov't jobs instead of a few more bucks in each of our pockets. Tax cuts help politically, not economically.
Maybe its because I'm coming from a frugal perspective: I'd rather see us pay for actual services and jobs than loan money to risky companies that we hope can pull us out of this thing. It is a really hard decision, and I can see where Obama's plan makes some sense: try a bit of everything, and see what works best. I guess I just feel like we tried the tax cuts and bank bailouts already, and they didn't do much good. So how does trying it again make sense?
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Hi Katy,
Thanks for the follow up, that filled in some gaps.
I guess I just disagree with you to some extent. I see myself as also coming from a frugal perspective, which is why the idea of preserving jobs that already exist is appealing to me, whereas letting those jobs hang in jeopardy in favor of creating new, different jobs (to be funded by myself and other tax payers) is a little less appealing. I tend to lean pretty far to the left, but I don't know that I like the idea of government stimulating the economy by becoming the economy.
I am also not of the opinion that this is an either/or situation. If our government has enough money lying about to fund a massively wasteful war in Iraq, it can certainly pony up some money to help these banks, provide services for it's citizens, and invest in badly-needed infrastructure upgrades. And because we're not the only country to be impacted by the failure or success of "our" banks, in the end the taxpayers may not be the only people to foot the bill.
As you point out, it's possible for the economy to be stimulated without banks having to lend massive amounts of money. I do know that were they more willing, there are a lot of businesses already standing in line waiting for loans: many cannot operate fully without these lines of credit.
I have always been a pretty optimistic person, so I guess I just have faith that we'll make it through this just fine. We've been through worse, after all. And even if this does become the toughest challenge we've ever faced as a country, that does not mean that this situation is either ultimately bad or ultimately unsurmountable. Who knows, maybe in the end it'll be a good thing. People might learn to be a little bit more reasonable about the shape of their lives (and banks and governments, too).
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