Many analysts decried the various Bush/Obama stimulus bills with the observation that deficits crowd out private investment. When Washington borrows money merely to funnel that same money back into the market via politically favored interest groups, nothing on net gets added to the economy. This is irrelevant to Keynesians who frequently disavow capital scarcity, but it matters to economists who correlate government spending with tight capital markets.
Now numerous commentators bemoan that banks are borrowing from the Fed only to invest in treasuries, rather than lend those monies out to struggling businesses. Some are frustrated that Wall Street villains enjoy a game of arbitrage at taxpayer expense. Others lament that no safeguards were enacted last fall to prevent this malfeasance. Some believe this reflects an underhanded ploy to monetize additional treasuries. It is a vulgar thought that the Fed could be employing banks under its purview in order to secretly monetize public debt. This is particularly frustrating to those who fear that aggressive monetary policies are harbingers of massive inflation.
However, nobody acknowledges that the expected crowding out occurs right before our eyes. The same economists who disregard capital maintain that "credit is the lifeblood of the economy." As if there can be credit without capital. As if people using other people's money (credit) offer more financial value than those providing the money (capital). These Keynesian enthusiasts of deficit spending and easy credit then whine that banks are lending to Washington instead of into the private sector.
The bankers, nearly wrecked by aggressive lending practices, may be "greedy," but they aren't stupid. Why lend to struggling firms in uncertain times when you can borrow cheaply from a quasi-government entity and then can lend it back to Washington at a risk-free profit? How can lending to high-risk borrowers improve an economy nearly capsized by aggressive lending practices?
Those same borrowers are now that much weaker amidst the throes of recession. Bankers were "greedy" when they lent to people unable to repay them and now they're "greedy" because they don't. But we want bankers, like all market participants, to operate in their own interests. Profits don't reflect greed so much as sound business practices efficiently satisfying market needs.
America's capital was depleted by the stock market crash and real estate bust. Therefore our markets can sustain less credit, not more, until savings accumulate or foreign investment accelerates. There can be no credit without capital. Fiat dollars can be printed in an attempt to offset the lack of capital with easy credit, but debasing the currency thwarts the savings vital to capital restoration. Why save with historically low interest rates promising no return and inflation that will eviscerate your holdings? The threat of higher taxes, suffocating regulation and general disdain for private enterprise emanating from Washington repels investment from our private sector.
Businesses repay their lenders by using said credit productively rather than conjuring up dubious capital via the printing press. Businesses provide the goods and services enriching our lives. Washington uses your money to entice votes. Printing money doesn't put those funds in the hands of the small businesses and entrepreneurs government claims to be helping. Instead, the new money flows back and forth between Washington and Wall Street finally arriving at Main Street in devalued terms.
Government handouts skew incentives and undermine growth. Paying people not to produce or enabling them to continue producing inefficiently cannot stimulate production. Don't blame banks for lending to Washington instead of capital starved businesses; blame the politicians devouring our scarce capital for blatantly uneconomic purposes. As Washington voraciously consumes credit, there is less available for private borrowers.
The solution to the ongoing credit crunch is simple. Cut government spending and stop debasing our currency. Only then will capital begin to restore and ultimately flow to the next round of visionaries with new innovations that better all of our lives.
The credit markets marry financial capital to intellectual capital. Banks serve as intermediaries connecting the capital of savers to people with promising new ideas requiring capital to become a reality. This can't happen when government intercepts the flow of capital for political purposes.
Capital is finite, but it isn't static. Businesses grow the pie or they go out of business. Public spending shrinks the pie. We don't suffer a credit shortage. We suffer a shortage of capital and a government vulture feasting on what remains while sabotaging the market's inherent restorative powers. Government spending must subside so capital can replenish. Interest rates should revert to higher levels as determined by market forces. This would attract investment from abroad and bring capital out of hiding.
As we contemplate a second stimulus package, Milton Friedman's words come to mind, "If a private enterprise is a failure, it closes down, unless it can get a government subsidy to keep it going; if a government enterprise fails, it is expanded. I challenge you to find exceptions." The last stimulus proved a disaster. Why would we go there again?
Bill Flax works in the banking industry. This column reflects his views and not those of his employer.
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