Wednesday, October 21, 2009

Obama Said to Offer Banks Capital to Lend to Small Businesses

Obama and his advisers don't even understand the banking system. The reason why banks are not lending is not because they are suffering from inadequate capital or because they don't have sufficient reserves (anyway, loans create reserves). Rather, it is because the economy is weak, businesses are suffereing and workers have lost their jobs.

What is a loan?

A loan is simply a promise to pay.

If people or businesses can't pay because they don't have jobs or because profits are weak or nonexistent in a sluggish economy, then banks won't make loans, which by the way, are created by a mere accounting entry on banks' books.

This is basic, "Banking 101," yet our own president and the highest policymakers surrounding him are at a loss to understand this.

My 9 year old son understands this.

If Obama wants banks to lend he should focus more on policies that boost total demand and put people back to work. That would create the environment where lending becomes attractive.

1 comment:

Mike Sandifer said...

I think it might also be helpful to charge fees for deposits with the Fed, rather than rewarding them with interest.