Question from reader:”Where is all the cash that the banks should have received for the bailout?”
My answer is that it is in the banks, they have received it, are receiving it and promptly are sitting on it. Other companies like insurance companies, other types of financial institutions are trying to get reclassified as banks to jump on board the government bailout train. It hasn’t been helping us as consumers, has it?
The banks are sitting on cash, fearful to loan it and, as pundits have said, are constipated with money. It is just stuck there. Like you, I am unsure what the trigger mechanism will be to let rip from the bowels of banking the loose cash. Whatever it will be that will get the money back into circulation -like orange juice and flax seed - we should be careful that the remedy will not make our digestive system worse. It will be interesting.
Think of it this way, the money supply HAS been increased. The problem that I see is that the velocity of it being introduced into the public sector is next to zero due to fear, uncertainty and the lame duck waiting period until we get our new President and Administration. Hedge funds have been dropping out of the markets (I for one am glad for that) but with their departure goes the leverage crazy wheeling and dealing that kept the cash rolling.
This means that we are in at least a period of short term deflation. So, if banks start lending cash again, they will increase their lending ratios but hopefully they will be watched a little closer this time around.
Will this mean low interest rates and free cash will start the cycle of bubble investing over again? Maybe but not to the degree we just went through, at least until people start forgetting about the bad times they are going through.
Will gasoline and gold go through the roof? I don’t see that happening right away. It will take time for markets to adjust and it may be that people are adjusting to living on less and in turn, spending less.
Will the American people practice sound savings and borrow less? Probably not but we can hope that at least for the short term we might be pleasantly surprised. Internationally we might be looking at some inflation down the line as well but judging by the financial reeling that other markets are doing six months after our financial meltdown I would venture to say that they are all tied together.
Maybe it would make sense for countries to start having their own monetary system independent of each other something like Canada has done. Canada has had minimal exposure to the financial meltdowns because of their limiting the participation of banks in speculative investments. In hindsight a great idea!
Back to the original question, once we get something to lubricate the banking system’s digestive tract to ease the fear, the money should flow.
Kim Isaac Greenblatt
Banks are constipated with cash.
[...] I’ve stated in another article, I think we are in financial constipation mode. The money from the Fed is “stuck” if you will in banks who are scared and [...]