“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain” – Mark Twain
Nobel Prize winning economist Joseph Stiglitz thinks our recovery stalled because the stimulus packages were too small. Apparently, President Obama downplayed the downturn. No really, that’s his version. Never mind the unprecedented use of “unprecedented” describing the “inherited” financial mess. Perhaps Obama didn’t want to criticize his predecessor.
Now Stiglitz has big plans to boost employment: banks should lend more. This sounds magnificent. Make those “fat cat bankers” hoarding cash like Scrooge McDuck put their capital, no wait – society’s capital – to good effect. He would even impose penalties for hoarding money.
According to Stiglitz, “Corporations are awash with cash, but the banks have not been lending to the small and medium-sized enterprises that are, in any economy, the source of job creation.” He proposes, “Lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not.”
As an underwriter for small and medium-sized businesses, this is very exciting. Why shouldn’t the government force banks to lend? They already force Americans to borrow. Next stop for debt: $15 trillion. Do you know who else wishes small and mid-market companies borrowed more?
Banks.
Perhaps residing behind ivy covered walls has skewed the good professor’s judgment, but does he understand what banks do? Bankers, as true of any profession, are not collective blobs with uniform interests or robot-like behaviors conforming to academic conjecture, but methinks most actively seek credit-worthy customers.
Banks are financial intermediaries. They marry those with capital not presently being maximized to those without capital, but whose desires are more pressing. In short, banks link savers to borrowers. Banks borrow from those “awash with cash” by paying interest on deposits. This accomplishes nothing unless they simultaneously lend elsewhere.
His assertion is equivalent to blaming Exxon for sputtering GDP because businesses consume less energy during recessions. Is Wal-Mart to blame for weakening consumer sentiment? Such reasoning is even sillier for banking because those customers most desirous of debt financing are frequently the least acceptable risks.
Loans, like any transaction, require two parties with each expecting to benefit. Consumers pick banks over attractive rates, convenience or friendly service. Lending generates the majority of bank income. Finding willing borrowers is their primary endeavor, but banks are also stewards of depositors’ funds. They must refrain from lending to parties who cannot or will not repay them.
America remains mired in economic stagnation. Stiglitz is right. Investment capital sits idle. How soon Stiglitz forgets, but the lingering malaise resulted from faulty lending. Our economic discomfort wasn’t instigated by banks lending too little, but by issuing abundant credit to those whose requests should have been denied.
Many believe the subprime crisis derived from deregulation which enabled excessive risk; some fault the GSEs, perverse mortgage incentives and the Community Reinvestment Act for encouraging political correctness over economics; others blame flawed monetary policies for exacerbating malinvestment and overconsumption. But everyone agrees reckless lending wrought financial horrors.
Banks succeed by issuing debt at the intersection of prudence and opportunity. Does Stiglitz suggest reversion back to the shallow underwriting standards of recent past? Or, in lieu of banks committing suicide will taxpayers attenuate the losses? Most banks repaid TARP at a profit, but Fannie and Freddie are still nationalized and scores of banks failed at taxpayers’ expense.
How does forcing banks to lend aggressively rejuvenate an economy so recently hammered by aggressive lending?
In typical Keynesian fashion, Dr. Stiglitz offers no hint that capital is scarce or that its owners more anxiously seek good uses for it than he does. Wealth is created by profitable enterprise and in a global economy, to attract capital, America must welcome investors. “Increasing taxes on the rich” reflects a curious means to that end.
Perhaps lending others’ money abroad that will never be repaid from atop the World Bank warped Stiglitz’s judgment. Maybe too long in academia postulating about pretend money has distorted his conception of finance. In theory, if we all drive sixty-five there will never be a traffic jam. In reality, to accelerate investment, those with capital must foresee returns worth the risk.
They don’t.
Stiglitz has repeatedly vilified Dodd-Frank as too lenient, but every check in a policy box bears a price. More expansive regulatory compliance makes larger loans to bigger businesses more cost effective than financing small businesses. Similar regulatory burdens stymie profitability for fledgling firms across myriad industries. Entrepreneurs are whacked from every angle.
The markets have rebuked his pleas for strict government oversight. Fearing Dodd-Frank’s 385 new regulations, which the American Bankers Association estimates will encompass 5,000 pages of bureaucratic nonsense, Main Street Bank in Texas will shutter operations. It earned $11 million last year making precisely the small business loans Stiglitz seeks.
The prevailing apprehension to invest stems from what economist Robert Higgs terms “Regime Uncertainty.” The rich recognize this administration targets them as easy villains. The threat of higher taxes and the foreboding implications of heavy handed regulation repel capital and impede its power.
Progressive taxation deters our best producers and exacting double taxation against investment income drives capital away. The uncertainty surrounding Dodd-Frank, Obamacare, and a piecemeal implementation of Cap and Trade via regulatory decree cascade into discord.
Why build new factories after the National Labor Relations Board’s dictatorial decree against Boeing? If firms are forced by unelected sinecures to operate where government desires despite dire economic consequences, why risk it? After the union’s benefactors in Washington pillaged Chrysler’s bondholders, why invest?
During the amazing boom from 1982 to 2007, on net, we attracted $6 trillion more capital than we exported. Today, Americans hide capital in inflation hedges like gold or ship it overseas. Americans invested about $351 billion elsewhere in 2010 while foreigners only invested $236 billion here. The divergence grows. Washington’s deficits intercept much of what does arrive.
Government spending absorbs capital. The economic tax extends beyond what the IRS extracts to what the Treasury expends. Whether they fund their waste through taxing, borrowing or printing, they smother the private sector. Government intervention misdirects resources from wealth generating endeavors into crony capitalism, consumption and graft under the pretense of stimuli.
Moreover, continuing dollar debasement makes America a precarious proposition. To again become a magnet for capital and fertile soil for finance:
Cut corporate taxes to restore American competitiveness;
Eliminate taxes on capital gains, dividends and interest income to attract investment;
Institute a Flat Tax or Fair Tax. The key is purity. No more 70,000 page tax codes where lobbyists and bureaucrats garner favor according to political expediency;
Stabilize money by implementing a gold standard or equivalent;
Let interest rates float according to market forces;
Restrict the tyranny of regulation via bureaucratic fiat through the REINS Act or like legislation;
Cut spending by restoring federalism and revert most domestic and social functions back to the several states.
And stop listening to Dr. Stiglitz.
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