A lot is being made of how the "private sector" saved financial giant CIT, causing people to question whether the bailouts were necessary at all.
Well...uh...YES!
Where did the private firms find the capital to save CIT?
The answer to the question is simple, it came from record pool of personal savings, put there by deficit spending. (Read how this works, here and watch me explain how it works here.)
Remeber the identity:
I = S
Which means that for every level of investment there is the equal level of savings (and vice versa).
Without the record level of savings supplied by deficit spending, there would not have been enough capital most likely for private investors to take a chance on saving CIT.
Had the government not deficit spent in the amount that it did and we were still dealing with a paltry--or even negative--private savings rate...no private firms would have had the ability to invest in anything.
If lending provides savings then when banks foreclose on a large number of home loans and realize losses on the principal of the loans, how does it impact the personal savings rate in the country?
ReplyDeleteVery carefully of course.
ReplyDeleteThe loses are part of the economic explosion and this where Frischberg, Lauffer, Bizradio, and many others get it wrong
and in light of the Norman Theory of Capacity - >
the valuation of the real economy last year was in part based on a huge sector of overleveraged instruments which were unregulated and were created by investment banks. therefore bank A had invested 30 times the amount of assets they had, maybe more.
the high volume requirement of these instruments rested on the prices of houses by way of the home loans that as we know were never held by the originating bank but instead incorporated into the CDO's and what-nots and distributed as debt around the world.
therefore, it was not the liar loans or the socialist Acorns that defaulted on the original home loan since that was only a $100 to $200 billion market which could have easily been bailed out if the the loans had not been sold by way of the deregulated derivatives markets which were applauded by Lauffer, and the Biz Radio Republican'ts.
Instead this 100 to 200 billion market was leveraged over 30 times into a trillion dollar fiasco and the entire real economy was valued at this level so that when the original home prices went down, then the market collapsed.
Therefore, since the market was operating in a certain capitalization then the market failed. The money needs to be replaced unless you believe in creative destruction which is a farce.
Personal savings then go up if people walk away from homes since they are not underwater.
i = s means investment and savings are a function of spending,
not lending provides savings.
spending is acheived by lending.
The corporate savings rate is hurt in the finance sector, but we know they are not lending to benefit themselves.
Lending in and of itself does not increase savings, however, if lending leads to an increase in investment and real output then savings increase. Foreclosures don't do anything to the savings rate, but to the extent that many foreclosures lower the value of assets, then all else being equal, most likely household wealth is reduced.
ReplyDelete