After months of drama, the sudden reality is that it has actually proven almost impossible to stimulate the economy in any sensible manner during the early stages of the great financial panic. Part of that is because main street is vastly better capitalized than previously understood.
Where money as such was desperately needed was to replace the capital losses incurred by the banking system itself brought about by well disguised forms of reckless speculative banking. These were outflows already incurred and their recapitalization allows the banks to stay good for their sources of money. Not all made it.
In retrospect, the primary source of cheap bank money most certainly was the pension plans of America, one way or the other. So this bail out was a bail out of the pension system primarily no one will be chasing high yields for quite a while.
When this is over, banks will be conservative once again. It is noteworthy, that the Canadian banking system blew up in a similar manner back in the early twentieth century and was reformed under strict supervision. They also tried very hard to wiggle out of this constraint. History in Canada was against them and doubly so today.
You are allowed to manage other people’s money in a very conservative manner and you get used to the idea that you accept very little risk at all. That is why you make a modest rate of return. This is a complete opposite of the mentality needed to operate an investment bank. I suspect the global banking system will now look a lot more like the Canadian banking system, particularly when they are now among the largest standing.
June 03, 2009
There are signs that the economy might be recovering. This optimism may turn out to be unfounded. Or it may turn out to be justified. But the reason I mention that only $36 billion of the stimulus has been spent in the first 3+ months since the stimulus bill passed is to remind people that we were told that we needed to spend $787 billion urgently without discussion or thought to save the economy and that the reason it would work was because It—and "it" is the spending of this enormous sum of money—would create jobs. It would create jobs by stimulating aggregate demand in the face of a slump in consumer spending. If indeed the economy does recover—the so-called V shaped recovery, then it cannot be via this increase in aggregate demand caused by government spending.
UPDATE: The total spending as of May 22 has been adjusted upward from $35.9 billion to $36.7 billion. So please adjust the number in the above paragraph to $37 billion...