In times of deflation, when prices of goods and services are falling, including prices of investment opportunities such as stocks, bonds, and real estate, money is a pretty good investment; it’s value is rapidly increasing relative to the things it can buy. And, in times of frequent bankruptcies, the worst investments are loans, especially business loans — way too much risk.
So, at times such as these, why would a bank’s CEO, mindful of his/her fiduciary responsibility to maximize stockholder’s profits and their minimize risk, put the money that’s in the vault into circulation by making loans? Can there be any mystery as to why TARP-I didn’t work? Can there be any rational expectation that TARP-II might work?
Putting money into the hands of bankers at this time is the worst way to stimulate the economy. And the failure of TARP is empirical proof that the continuation of the meltdown is an issue of neither solvency nor liquidity. Rather, it is yet further proof that the collective pursuit of private interests does not always yeild the common good.
As FDR showed us, the only way to end a depression is to get money into the hands of people who will circulate it, e.g., people who must spend it on food and shelter to survive or people members of the middle-class who are so secure in their jobs that they don’t squirrel it away. Putting it into hands of the investing class, e.g., via tax cuts or into the hands of bankers is economic insanity.
And, Republicans complain that some of the proposed stimulus projects are a waste. But, for example, there has never been a greater economic waste that WW-II, which got us out of the Great Depression. It put money into the hands of Rosie the Riveter, who circulated it.
And, there’s one further caution about putting money into the hands of bankers, as Paulson ($750B) and Bernanke ($2T) have done. Once there is a turn-around, all that money is going to come out of their vaults and hit the street at once with predictable consequences; run-away inflation.
What to do about it? Buy the banks, just like we did the saving and loans. We’ll never get a better chance to buy our money back, and come the turn-around, it’ll be too late.