Actually, “banks” in the title above is a term one can apply to any lender, including insurance companies, venture capital funds, etc. And yes, they are hoarding cash and refusing to lend money, leading to speculation that the central banks of the richest countries in the world will be coordinating a cut of their respective interest rates this week to spur banks and other lenders to come out of hiding because the money must flow:
TOKYO (Reuters) – Central banks and regulators scrambled on Tuesday to relieve the strain on financial markets frazzled by another hefty blow to confidence, this time from the rejection by U.S. lawmakers of a $700 billion rescue plan.
Global central banks more than doubled the amount of dollar funding to $620 billion, but the move showed no signs on Tuesday of thawing the freeze in money markets where banks are hoarding cash and bracing for more trouble ahead in the deepening year-long credit crisis.
Analysts said central banks may now be forced to cut interest rates in a coordinated move because their massive fund injections have done little to ease strains that are threatening to become a bigger systemic breakdown that could endanger the global economy.
Hey, I’m no economist, and I didn’t sleep in a Holiday Inn last night, but even I can see that what we have is the equivalent of the proverbial “stuffing cash under the mattress,” only this time it isn’t your nutty old Uncle Tim or Aunt Lucy burying jars of Benjamins in their backyard, it’s every lender on the planet, scared to death that by putting their money in the hands of other lenders they could lose their proverbial shirts, pants, belts and suspenders. And so we have the bizarre experience of foreign leaders and finance ministers publicly begging our Congress to pass a bailout bill, any bailout bill, ASAP, just to keep the world’s economy from running out of cash:
Australia, Britain and Europe are working to convince U.S. lawmakers to pass the $700 billion rescue package, which would allow the U.S. Treasury to buy up bad debt from banks, Australia’s prime minister, Kevin Rudd, said on Tuesday.
“What’s important is that all people of good will around the world act in concert with our friends in the United States to see the right measures taken through the U.S. political process to stabilize the global financial system,” he told a press conference.
And that’s not all they are doing. They’re pumping money like crazy into the system. Japan’s central bank, to cite just one example, just made available in a record 28 billion dollars because its banks are refusing to lend money to “foreign” banks. South Korea has banned short selling in its markets, and Taiwan and Hong Kong are placing limits on short sellers in theirs. Despite these actions, many lenders are foundering, looking for any cash they can find.
In what some analysts have called Black September, the bankruptcy of Lehman Brothers, the nationalization of insurance giant AIG and demise of big banks like Washington Mutual have shattered institutions’ confidence in dealing with each other.
The strains have had a ripple affect in the commercial paper markets used by companies for short-term cash needs that threatens to cause a broader hit to economic activity.
Banks have had a hard time coming up with the dollars they need to fund their positions and operations, leading to a rush for dollars wherever institutions can find them. […]
The Federal Reserve more than doubled reciprocal swap lines with the European Central Bank and eight other central banks on Monday to $620 billion from $290 billion previously.
The actions by the central banks have left banks with more than they need. But many are still clinging to the funds.
“No one wants to lend at the moment because there’s too much fear,” said a senior money market trader at a European investment bank in Singapore. “Most banks are keeping a nice cash buffer for themselves at the moment.”
This isn’t a phony crisis, it’s very real, and no one should be taking delight in seeing financial institutions fail, simply assuming that a few greedy speculators and gamblers are merely getting their just desserts, or that the free market is merely correcting itself. When financial collapses and panics occur, they might start with hurting lenders but they never stop there. One relevant historical period to consider is the late 19th and early 20th centuries, the so-called “Gilded Age” when lack of regulation of the markets led to speculative bubbles that periodically burst leading to a series of depressions that destroyed the livelihoods of millions of people in America.
(cont.)
The Great Depression of the 1930s was called “great” for a reason. It followed a long series of depressions which afflicted the American economy throughout the 19th century. […]
Panic of 1873
* The investment firm of Jay Cooke and Company went bankrupt in September 1873 as a result of rampant speculation in railroads. The stock market dropped sharply and caused numerous businesses to fail.
* The depression caused approximately three million Americans to lose their jobs.
* The collapse in food prices impacted America’s farm economy, causing great poverty in rural America.
* The depression lasted for five years, until 1878
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* The Panic of 1873 led to a populist movement that saw the creation of the Greenback Party.Panic of 1893
* The depression set off by the Panic of 1893 was the greatest depression America had known, and was only surpassed by the Great Depression of the 1930s.
* In early May 1893 the New York stock market dropped sharply, and in late June panic selling caused the stock market to crash.
* A severe credit crisis resulted, and more than 16,000 businesses had failed by the end of 1893. Included in the failed businesses were 156 railroads and nearly 500 banks.
* Unemployment spread until one in six American men lost their jobs.
* The depression inspired “Coxey’s Army,” a march on Washington of unemployed men. The protesters demanded that the government provide public works jobs. Their leader, Jacob Coxey, was imprisoned for 20 days.
* The depression caused by the Panic of 1893 lasted for about four years, ending in 1897.
Sound familiar? While the current crisis does not the result from the exact same conditions that triggered these earlier “depressions” there are enough parallels to give one pause. Lack of regulation of financial and securities markets. Speculative bubbles that burst, financial firms collapsing, stock markets plummeting, and banks failing. And the end result? Millions of jobs lost and severe poverty for the little people (i.e., you and I). The major difference is the potential scale of this crisis, and the increased complexity of the financial markets in the 21st Century, but the underlying causes are remarkably the same.
Financial panics are not misnamed, nor is the term an oxymoron. They are at heart, an emotional reaction to market conditions. Markets, whatever economists might say, are not rational, at least not in the short term. And these periodic emotional frenzies in the markets, the irrational exuberance which creates speculative bubbles followed by the equally irrational fear which follows the collapse of those bubbles, have been well known to anyone who studies the history of our economy. What is surprising is that so many economists and business people believed that under our current global economic “free trade” regime we had transcended history, and that markets would now act, as they had never acted before, to self-regulate and self-stabilize themselves without government oversight. This misguided vision by these arguably intelligent, but still not completely rational, economic ideologues of the right, these cult followers of Ayn Rand and Milton Friedman, are responsible for what we see happening to our “global economy” as I literally type these words.
Which is why during the Great Depression FDR and a Democratic controlled Congress created so many government agencies, and strengthened the powers of existing ones, in order to regulate financial institutions and permit the Federal Government to intervene in our financial markets during times when panic in the markets reared its crazy, ugly head. Those agencies and the control they imposed were not always employed to create optimal results, but the fact is that under the regulatory framework established by Roosevelt’s “New Deal” we had an extended period of relative financial stability which lasted until Republicans began dismantling those controls during the Reagan years.
What we are seeing now is the inevitable result of that de-regulation agenda, one that has come to fruition under President Bush and the Republican Party, but for which many establishment Democrats, particularly President Clinton and other DLC Democrats who enabled the efforts of corporate lobbyists and the Republicans in Congress, bear responsibility as well. Over the long term we need to re-impose that regulatory framework that FDR created, and provide new oversight powers to the Federal agencies to meet the demands of the global financial marketplace. we also need to encourage a similar effort abroad in other major economic powers such as China, Russia, the Asian countries and the Economic Union.
Until that can be accomplished, however, we will remain at the mercy of the turbulent economic tides which these libertarian economists and their willing disciples, with their dreams of an unregulated “free” market have unleashed. Tides that are driven less by reason and logic and more by emotions such as greed and fear. To the extent we can take any responsible action in the short term to create a perception of stability and thus tamp down the fears that are raging through the brains of bankers and investors around the globe, we should do so. It might not be enough to prevent a lot of misery, but it might help limit the fallout until our political leaders can undertake the heavy lifting to right our economy which is so sorely needed, and which for so long they have actively shunned.
