Does the average American know what the word “liquidity” means? According to the government, it is something that is drying up. It reminds me of that old adage “You don’t miss your water ‘till your well runs dry.” In this case, you don’t miss your credit until your bank tells you to take a hike.
But banks don’t seem to be doing that. Go to any local bank and try to refinance your home. You won’t have a problem. Or try to get a credit line for your business. No problem there either. Or try to qualify for an FHA mortgage. Not much of a problem there either. So where’s the liquidity crunch?
The only crunch I see is that banks won’t lend to each other. They don’t trust what might be in each others’ portfolios. They are afraid that they might lend money overnight to a bank that is going to declare insolvency the next morning. That is the only crunch. This is not a liquidity crisis. It is a bank capitalization crisis.
What do I mean by that? Banks are required to keep a very small percentage of what they have lent in cash or cash equivalents. When they go below that percentage on any particular day, they can lend each other money to meet “capital requirements”. If they can’t find another bank to lend them the money, they can borrow the money from the government at the “Fed Window”. That is what the Fed discount rate is all about; it is the interest rate charged by the Fed to a bank that needs overnight funds to meet its capital reserve requirements.
What banks are afraid of is that the bank that they are lending overnight funds to might have some of the bad securities, collateralized debt obligations (CDO), in its portfolio and that these CDO’s are no good because they are made up of loans that have defaulted and cannot be sold in the marketplace, thus making them illiquid. This is the liquidity crisis. It has nothing to do with the average American or Main Street.
So what are these banks doing with all this money they are being given by the government? Are they adding it to their capital reserves so they can meet the government’s capital requirements? You would think that this would be what the money is for. It would, ideally, give them enough cash to keep them solvent; so that the bad CDOs that cannot be considered as part of their cash, or cash equivalent, for purposes of meeting their capital obligation can be removed from their balance sheets and they can avoid insolvency.
Instead, these banks are being forced to take money they don’t need, and in many cases don’t want, and they are buying up other banks. As everyone reads in the newspapers, banks are purchasing banks almost every day. This does not do anything for the average American whatsoever.
There is no liquidity crisis. There is no credit crunch. This is never going to trickle down to Main Street. This is strictly a problem for greedy commercial and investment banks that made bad investments. So why tell the public that they need to get behind the banks and allow their representatives to vote to give these banks all this money? Don’t our elected representatives understand what is being done with this money?
There is no bailout. There is an enormous lie being told to the American public hoping that the average American doesn’t understand what is really going on; and he/she doesn’t understand. The panic is being created by the government and greedy bankers. The large majority of banks in America have no CDOs in their portfolios. The large majority of banks in American have no “toxic assets”, or non-performing loans, on their books because they sold them off to investment bankers who created CDOs out of them. And most local community banks only made loans to those customers who live within the community and have good credit scores. These banks have no problems.
This is the largest one-time transfer of wealth our economy has ever seen. Wealth is being transferred from the average American to the bankers. This is not going to trickle down to Main Street because the only problems Main Street is having is that unemployed people can’t shop and the others are scared and stopped spending.
Let’s call this bailout what it really is; The Wealthy Bankers Restoration Program!