Re: Better in the red than dead

[Eugene Coyle <eugenecoyle@xxxxxxx>]

Robert Manning has identified -- not to blame him --- how I think monetary
policy really works.  It doesn't work much through raising interest
rates but through banks becoming more and more reluctant to lend. 
These things usually are highly, if not perfectly correlated, so it appears
that high interest rates are choking the economy.
    But my view is that it is the institutional decisions
to tighten, to refuse to loan or to refuse to loan as much, that has choked
off the economy in the past.  Banking has always been about relationships. 
When monetary policy tightened banks would refuse to open new relationships
and when rolling over existing loans would tell the borrower "We can only
let you have 70% [say] of what you old loan was."  Businesses, at
a time of a boom, which was when monetary policy was tightened, would be
willing to pay high and higher rates for loans for expansion.  But
they couldn't get the money, regardless of willingness to pay.
    I've always thought that Milton Friedman, the high
priest of money and banking, didn't have a clue as to how banks worked.

    Gene Coyle

Robert Manning wrote:

 The sluggish growth in consumer spending and household debt levels is at least partially due to the reticence of banks to increase credit lines to heavily indebted households as well as their reluctance to reduce finance rates.  Also, keep in mind that traditional indicators of consumer debt do not adequately reflect current household finance strategies as leases, rent-to-own contracts, pawn loans, and "payday" loans are not included in these consumer debt statistics.  Not incidentally, the latter are soaring.

Banks reluctance to lend rather than consumers' need to spend is more likely to exacerbate the impending recession

r.manning>>With borrowing rates at their lowest since the early 1960s,
>>households
>>are taking a relaxed view about their debt burden.
>
>this contrasts with the US [still the spider at the center of the
>world-wide economic web], in which consumer spending recently rose
>much
>less than did personal income. After a period of what might have
>been
>"necessitous borrowing" (to use Bob Pollin's phrase), it might be
>that US
>consumers are moving toward actually saving, encouraging a deepening
>recession.
>
>Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~JDevine
>

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