Why Credit Remains Tight

October 10th, 2008

It’s October 10, 2008, and for the last two weeks, world credit markets have been seized with illiquidity, or whatever you’d call the opposite of liquidity … dryness, I guess.  Credit has grown stiff and creaky.  The cost of short-term lending has shot up.

Treasury Secretary Henry Paulson has made clear that the rapid increase in the cost of short-term collateral-free borrowing between banks, businesses and other banks — a.k.a. the “commercial paper” market — is the doomsday scenario that all the world’s governments should now fight to prevent.

And central bankers around the world are reaching further agreement that reducing the cost of credit is an urgent goal to prevent a global financial meltdown, and that to do so, we must infuse banks with cash.  Billions and billions of dollars, euros and yen of delicious money.  This has been Paulson’s argument for some time, but now other G7 financial analysts are coming to the same conclusion.

Funny thing is, we’ve been doing this for a little while now, we’ve kept on infusing and infusing and infusing the banks with cash, and yet they keep raising their commercial paper rates.  This is the opposite of how it’s supposed to work, apparently.  The cash infusions are supposed to assure everybody that nobody’s going broke.  They are supposed to remove uncertainty, and reduce panic.  It’s like they’re supposed to spend the cash on Valium, but they’ve been buying up crystal meth instead.

Why isn’t it working?  Why aren’t banks loosening up their credit when we give them billions of dollars?  After all, if I gave you billions of dollars, wouldn’t you relax a little bit about your finances?

But imagine this scenario: Suppose I give you billions of dollars, and then I told you in no uncertain terms that if you don’t start lending right away, I’ll be forced, against my wishes … to give you billions more dollars!  Would that motivate you to lend?  What message am I sending there?

Paulson and his cronies have made a classic investing error — they didn’t forsee that the market would develop counterstrategies to their strategies.  At first, I’m sure, all of the major commercial paper lenders truly were scared, concerned about their solvency, unsure what they owned, and hoarding cash.  But at this point, with the cash-infusion concept going global, the bankers have figured out that the longer they snafu the credit markets, the more free money they’ll receive.

To reiterate: we are now paying the major banks billions of dollars to prolong this crisis, for their own benefit. The longer they can hoard credit, the more they get paid.  The wealth of nations will be theirs.

“But that’s madness!” you cry.  “The stock market is collapsing!  Those bankers must be losing millions every day!”  And that may be true for the bankers.  But for the banks themselves, with all their assets having slid into oblivion already, I don’t know that their exposure to the market crash matters much compared to the possibility of receiving HUNDREDS OF BILLIONS OF DOLLARS FOR FREE.

I think Smilin’ Hank Paulson may have figured this out, and that’s why he’s decided to side-step the middlemen and get the US Government into selling this commercial paper stuff.  And frankly, that makes a lot more sense to me than handing out hundreds of billions of dollars to Hank’s personal friends and former co-workers.

In fact, I have to wonder why we didn’t enter the commercial credit market weeks ago, since it directly addresses the specific market problems we’re worried about, without resort to trickle-down theories.  And since government can clearly make money on this, as opposed to Paulson’s plan of spending billions on chronically unknowable and unsellable securities.

But I’m willing to bet there’s a counter-strategy there, too.  Like, let’s see … could Goldman Sachs borrow billions of dollars from the government, and then refuse to pay it back?  And then ask for a bailout?  I’m just brainstorming here …

In the long run, the only thing that works is to let the rotten bastards fail.  Let it all break down, and then pick up the pieces and start over.

One Response to “Why Credit Remains Tight”

  1. Brady Lee Says:

    Paulson, All the big banks must be investigated by the FBI- Someone has to do some time in Prison. Someone must pay for this corruption.

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