Christina Romer Gets it WRONG: “We Need Banks to Lend Like Crazy”

-

romer.jpgOn CNN’s State of the Union show, John King just missed the key zinger statement made by Council of Economic Advisers Chair Christina Romer.
Romer refused to get into the issue of how the Obama administration shoved Senate Finance Committee Chairman Christopher Dodd to “reluctantly remove” a provision that would disallow bonuses from firms that received federal relief — and didn’t want to get into how on one day Summers defended the bonuses when the next day Obama said they stank.
But what really showed Christina Romer’s course — and that of the administration at the moment — was her line that:

We need them [meaning banks and financial institutions] to lend like crazy. . .

WRONG. This kind of statement is a manifestation of the fantasy that the U.S. economy can bounce back to the kind of turbo-charged, quick growth consumption economy we once had — that depends upon consumers devouring goods far beyond their ability to pay for them and depends equally on financial institutions making decisions that are out of line with dependable returns.
“Lending like crazy” is exactly what helped trigger the global financial crisis — and reflating those trends would be a major mistake if that is what the Obama administration is pushing.
Obama admitted a misstep in referencing the “Special Olympics” in his Jay Leno chatter about his poor bowling performance. Christina Romer’s encouragement of “lending like crazy” is a far worse reference that should be immediately addressed and withdrawn by Romer and the White House economic team.
— Steve Clemons

Comments

16 comments on “Christina Romer Gets it WRONG: “We Need Banks to Lend Like Crazy”

  1. Dan Kervick says:

    Tony,
    Where do you think these jobs are going to come from? Existing firms that want to innovate and expand their operations, and entrepreneurs that want to start new businesses, need capital to do it. If they can’t get loans, they can’t build these businesses, and thus can’t hire new workers.

    Reply

  2. jon says:

    You make some good points, Steve, but I disagree with your
    main premise. A goodly amount of our unemployment and poor
    economy can be traced back to a lack of adequate and timely
    financing. This shouldn’t suggest a simple reversion to business
    as usual, but there are businesses that can’t access capital for
    plant, equipment, materials and wages even though there is
    current demand for their products. Students can’t get education
    loans because the entire industry is locked up.
    Because bank lending is based on loan/assets ratios, when the
    value of your underlying assets decline, people cash out and you
    aren’t getting new deposits, then banks can’t lend. A lot of them
    are using government funds to build back up their reserves and
    deleverage themselves. They won’t be able to lend until they
    reach those thresholds again, and this is required by regulators.
    But the big question that you’ve put on the table is how we
    might rebuild the economy without so much reliance on
    discretionary US consumer spending. Rather than saving, like
    the Japanese and other nations do, for the past generation US
    Households have been transforming their assets into spending.
    We have a negative savings rate, and a shocking number of
    people now have negative equity in their homes.
    How will we rebuild the economy if everyone already has all the
    houses, cars and flat screen TVs that they need? Can we
    transition to a largely service based economy, and can we
    generate sufficient foreign trade from that to bring our balance
    of payments back into line? I’m sure China would be most
    interested in this question.

    Reply

  3. TonyForesta says:

    Oh…, and the lending issue is moot until we tackle the gain employment of JOBS issue. Lending is NOT the problem or the critical issue. JOBS and the ruthless undermining and robbing and pillage of the poor and middle class the feed the superrich, the predator class IS the critical problem. Alter these dynamics minimally, and the economy rebounds. More workers with real cash, buying more products, creating more business.
    The current economic enviroment is a feeding fenzy for millionaires, and Olympian for billionaires. There are vistas of ghoulish exploitation are vast, and stressed properties and assets are ripe for the picking. It’s always great to be king, predator class, and/or superrich, – but seldom do such extraordinary opportunities of ghoulish and wanton abuse and exploitation present a more attractive opportinity.
    What are we?
    Are we greedmongers unconcerned about our children and the least of us, or are we decent human beings who accept extraordinary good fortune and accomplishment with humility and compassion?
    The former are savage predatory beasts,
    The latter, compassionate mamals.
    What are we??

    Reply

  4. TonyForesta says:

    It is possible that Mr Clemons and I are peering through the keyhole and percieving different perspectives. But my opinion is that they (the good government which precludes any involvement of Wall Street insiders and Geithner, Bernake, Volker, of Summers et al) would succeed in attracting private capital Dan Kervick.
    Many of these private investors are foreign soveriegn funds or hedge funds that have been burned by the crown jewels of American finance. These sitting-on-the-sidelines entities, (which I agree do exist) are simply not trusting the pitches corporate bruting of the American financial titans and their wild and exotic products.
    Here’s where it gets tricky, because America and American financial institutions, and American financial institutions, trillons of dollars of these toxic products pervade the global economy. Here is where economics intersects with politics and mercuric slurry of psychological, cultural, religious, and military metrics. Ultimately because of America’s hypersuperior military capabilities, the global economy looks to American financial products as the best or least “risky” safehaven and that thing called security. The problem is that our economic policies have undermined and called into question this trust and that thing called security. There was much wailing and gnashing of teeth, and chaos ensued.
    Soros is correct in that the financial system has collapsed. Fiat currencies alone propup the financial system. The critical issue is how these FIAT currencies are adminstered. Are governments ruthless bailingout FAILED institutions, managements, and models for profit or in some delusional hope the pouring more gas onto the fire will remedy or extinguish the conflageration or problem, – or are the FIAT currencies directed toward job creation, education, health care, infrastructure, and the greenfuture? The former is doomed and certain to prolong a certain collapse, – the latter is our only hope, and the one way out of real horrorshow reaction to abuse and criminality and heartlessness of the predator class.

    Reply

  5. Dan Kervick says:

    Tony, I think you and Steve are talking about different issues. Whether existing financial institutions do the lending or some new government owned and run banks do the lending, the point is that we need to get lending moving again. I think Steve agrees with that. He just doesn’t like the idea that the lending should move “like crazy”, since excess borrowing and Ponzi lending are what got us into this crisis.
    There is a lot of private capital sitting on the sidelines right now. If the banks were nationalized, as you prefer, would they be capitalized entirely with taxpayer dollars, or would they succeed in attracting that private capital?

    Reply

  6. TonyForesta says:

    I don’t presume to speak for Mr. Clemons Dan Kervick, but NO. This issue is not about banks lending. Onerous pernicious PONZI scheme banks aren’t lending because they are hording cash, make that tax payer cash. The banks, their managements, and their models FAILED. These banks must be nationalized, carved up, and sold off. Their respective management must be fire and prohibited from any further official participation in the finance sector. The government can then return to lending like crazy using our tax payer dollars (NOT TO BAIL OUT THE THIEVES AND SWINDLERS WHO CREATED AND PROFITED FROM THIS CRISIS), – but to put trillions of dollars back into the economy to support small business, college education, and eventually home, car, and other consumer purchases. The government would in affect become the lender of last resort, until such time as a real economic recovery is recognized.
    There will be no recovery bailing out, shielding and pouring trillions of the peoples tax dollars into the off shore accounts of the sociopathic swindlers and thieves on Wall Street who conjured, profited wantonly from, cloaked, and are exacerbating the worst financial crisis since the great depression. FAILED institutions, managements, and models FAILED and must pay the price for that failure. Propping up FAILED entities up with trillions of taxpayer dollars is a recipe for disaster with NO hope for success!

    Reply

  7. Dan Kervick says:

    This seems like an over-reaction, Steve. If she had just said, “We need the banks to lend more,” would you be OK with that?

    Reply

  8. Hugh J. Ivory says:

    The real issue is restoring some form of The Glass-Steagall Act, and getting rid of Phil Gramm’s Commodities Market Modernization Act of 2000 so that we no longer have banks and everybody else going off the deep end without any controls.

    Reply

  9. Hugh J. Ivory says:

    The real issue is restoring some form of The Glass-Steagall Act, and getting rid of Phil Gramm’s Commodities Market Modernization Act of 2000 so that we no longer have banks and everybody else going off the deep end without any controls.

    Reply

  10. TonyForesta says:

    In attempting to be reasonable, reasonable and accepting that there are very wild spirits out there very angry at the swindlers and thieves on Wall Street and the Obama government’s singleminded intention of using our taxdollars to bail them out for FAILURE, the “quite explicit insinuation that she shares the worldview of those who wrecked the financial system” is revealed in her assertion that “We need them [meaning banks and financial institutions] to lend like crazy. . .” Again supply siders only care about banks. The demand side of things and particularly a healthy relatively prosperous American middle class drives the economy, and all the lending like crazy in the world won’t lift America or the world out of this turmoil, if Americans don’t get back to work.

    Reply

  11. reasonable says:

    You provide little context for judging Cristina Romer’s comments. It seems extremely unlikely that Cristina Romer — a well credentialed moderate academic economist — wants us to return to the unregulated casino economy of recent past years. But as rich and others have pointed out here, in recent months lending has **fallen** like crazy off a cliff, to the point that there is hardly a single home mortgage, a student loan, or commercial bond issuance that can be done without the direct or indirect participation of the USG anymore. The private lending economy has been kept alive only b/c the USG has the artificial lungs and kidney machines hooked up. Starting from where we are, getting banks to start lending again with confidence and without a USG guarantee behind every transaction would be a ‘crazy’ difference from what we have going now.
    You’ve been very harsh on the Obama administration lately. It’s one thing to go after the logic or the details of their plans — which I have not been to happy with myself either — but it’s another to start already (only weeks into a new administration left to clean up the one of worst messes of an economy we have had in our history) to start questioning the intentions of the administration’s personnel.
    It’s really not constructive, nor does it move the debate forward.
    Cristina Romer has a long record of writing on economic policy matters. Can you point to a single piece that would support your quite explicit insinuation that she shares the worldview of those who wrecked the financial system?

    Reply

  12. TonyForesta says:

    Creating and incentivizing well paying JOBS is the only hope for real recovery.
    It is shattering to admit that Obama is bent on bailingout and shielding the sociopathic predator class swindlers and thieves in the finance sector who conjured, profited wantonly from, cloaked, and are now exacerbating the worst economic crisis since the great depression.
    Krugmans commentary yesterday hit the critical points. No one on Wall Street is responsible for the crisis? The Wall Street irreedeemable debt models and PONZI schemes are sound and only need a few trillion more taxpayer dollars to reanimate the flow of imponderable wealth out of the poor and middle class and into the offshore accounts of the predator class. Everything is fine. There is no crisis. It’s a supplyside issue. All that is required is for the FED to print money out of the myst, and funnel trillions of taxpayer dollars and debt to the sociopathic predator class swindlers and thieves on Wall Street.
    There is not one progressive, or liberal or labor voice on Obama’s economic team, all of whom are Wall Street insiders and predator class cronies.
    Robbing from poor and middle class Americans to feed the predator class, the superrich was the bushgov policy for eight years. Obama is repeating and mirroring this immoral and criminal enterprize.
    Worse, – robbing from the poor and middle class to feed the superrich, the predator class and bailing out and shielding failed institutions, failed managements, and failed models is unsustainable and doomed to fail. The economy is doomed to short term single sector speculative spikes benefiting select oligarchs and cronies, wherein a very few imponderable wealth predator class sociopaths recognize obscene profits, – and then savages busts and the new irredeemable debt product, and PONZI scheme inevitable collapses. It’s death spriral.
    I read of a looming collapse of commercial realestate bubble and massive defaults, on top of credit card, carloan, and student loan defaults, on top of dangerously undercapitalized pension funds, and potentially devastating treasury bubble collapse.
    None of these pending tsunami’s will be redressed or corrected by bailingout and maintianing FAILED institutions, FAILED managements, and FAILED models.
    Sharpen your pitchforks, we’re doomed anyway.

    Reply

  13. Steve Clemons says:

    Dan — trying to do something about Davinchi…I delete his posts every day…but not watching all the time, and obviously don’t want to make Captcha system worse than it is. best, steve

    Reply

  14. rich says:

    While I agree with your point about rash language here, it is also not true that there’s no one worth lending to right now.
    There are plenty of healthy businesses and credit-worthy individuals and families that do have good credit. Their businesses are in many cases viable, proven and profitable — yet they’ve been hurt by the false accounting and shady business practices that have caused this economic crisis.
    Your recent post highlighting Joe Stiglitz’s statement that ‘credit is not a flow’ caught my attention, for that very reason. I don’t know who managed to persuade you that there’s no one credit-worthy/worth lending to. But it seems to me that claim is contradicted by the many reports of profitable companies that do have contracts waiting to be filled — but were forced to close because there’s so little credit out there that even, say, the state of Illinois couldn’t get the credit it needs to operate.
    So, I don’t believe it’s accurate to say banks aren’t lending because there was no one worth lending to. They might not be lending because they’re too busy making various counterparties whole. But why counterparties or other bad bets should be paid off first — and it is a payoff — before these banks start to function within the wider economic sytem and in response to the public to whom they are responsible — isn’t clear.
    The ‘credit is not a flow’ premise doesn’t work, in my view. Sure, it’s meted out in contracts — but so is water. After farmer or municipality signs a contract for 12 million acre-feet of water or so per year, someone turns a valve somewhere, and the water flows. It can flow once-a-month at 1 million acre-feet each, or steadily all year — and the same is true of credit. One contract can be delivered in a lump sum. Or a monthly basis. Either way, you add up all the loans extended, and you have an outflow of funds.
    It’s just calculus. delta x/delta y. Not that hard.
    There’s no reason to make counterparties whole prior to extending funding / credit to businesses that are functional. It may be their contribution to the economy was negligible anyway. Particularly egregious was tne notion that shorting stocks was a valid economic activity that should pay off the bettor with actual cash. They should be stiffed, full stop. Here’s why: they’re playing with someone else’s money. There’s no risk. Anyone can do that. They have no stake in the game — so they have nothing to lose. Except the other guy’s shirt, that is. Borrowing money to bet somebody else is gonna lose is just senseless: if the money at risk is not yours, you have no incentive to bet well. And betting somebody else is gonna lose is an artificially drag on the system — one that still doesn’t put a stake in the game where it’ll do somebody some good. And that’s key.
    We’ve talked about ‘asset’-backed derivatives — where the ‘assets’ were worthless. But shorting stocks is essentially the same thing, or worse. There’s no underlying asset: borrowing against somebody else’s money can be repeated who knows how many times, and worse, allows players to enter the game when they themselves do not have any assets to gamble with.
    They offload the risks, participate without assets, and reap rewards that are not only unearned — but should go to folks with real economically productive businesses. The knowledge applied is corrosive, founded on something that’s not really there, profiting from parasitizing failure, refusing to invest in what will succeed, and muddying market signals in the process.
    Gotta say — there’s no excuse for bailing out counterparties or honoring ‘debts’ to a system of global finance that couldn’t even see stright. They couldn’t even evaluate their own market mechanisms. And since their fundamental business model is wrong — dead wrong — why are we responsible for making it whole?
    In fact, making it whole is a fatal error. These guys bet, and lost. Those who objected to the deregulatory fever were ignored — but proven right in the end. Why should we pay off those who were wrong? It’s the underlying premise that needs to be reformed, and that hasn’t happened yet. As long as Obama is subject to this paradigm, rather than altering and reforming it, he’ll be captive to the fallout from its collapse.

    Reply

  15. Dan Kervick says:

    Steve can you do something about this Davinchi character?

    Reply

  16. PissedOffAmerican says:

    Well, King also missed an opportunity to underscore how our politicians lie to us with impunity.
    Dodd showed himself to be a liar, pure and simple. But our media would rather jerk-off about Obama’s gaff regarding the Special Olympics.
    Its astounding to me that we have reached the point where we just ignore blatant purposeful lying by our so called representatives. I guess the media needs to catch someone getting or giving a blowjob before they can reach any form of universal outrage for the actions of these criminals in Washington.
    Honestly, what possible excuse can we find to ever trust anything Dodd says in the future? What has he lied to us about in the past? In a rational political environment, Dodd would be history, because of what use to the people is a politician that is a known liar?
    But in this irrational perversion of what was once a star model for governance, the labels “politician” and “known liar” have become synonymous.

    Reply

Add your comment

Your email address will not be published. Required fields are marked *