Re: [Pen-l] Equity injections won't work

["Jim Devine" <jdevine03@xxxxxxxxx>]

> Temporary full state ownership is only solution
> By Paul De Grauwe
> Financial Times
> October 9 2008
>
> The essence of what banks do in normal times is to borrow short and lend
> long. In doing so, they transform short-term assets into long ones, thereby
> creating credit and liquidity. Put differently, by borrowing short and
> lending long, banks become less liquid, thereby making it possible for the
> non-banking sector to become more liquid; that is, have assets that are
> shorter than their liabilities. This is essential for the non-banking sector
> to run smoothly.
>
> This credit transformation model performed by banks only works if there is
> confidence in the banks and, more importantly, if banks trust each other.
> This confidence has now evaporated and, as a result, the model fails. The
> generalised distrust within the banking system has led to a situation where
> banks do not want to lend any more. That means that they continue to borrow
> short but lend equally short; that is, acquire the most liquid assets.
>
> The result is a massive destruction of credit and liquidity in the economy.
> The non-banking sector cannot borrow long so as to acquire liquid assets
> that they need to run their business, because banks do not lend long
> anymore. This risks bringing the economy to a standstill. A depression is
> looming.
>
> It is important to realise that this liquidity crisis is the result of a
> co-ordination failure: bank A does not want to lend to bank B, not
> necessarily because it fears insolvency of bank B but because it fears other
> banks will not lend to bank B, thereby creating insolvency of bank B out of
> the blue. Thus bank lending comes to a standstill because banks expect bank
> lending to come to a standstill.

the fact that a lot of banks have a lot of toxic ("nonperforming")
assets undermining their collateral has nothing to do with it?

-- 
Jim Devine /  "Nobody told me there'd be days like these / Strange
days indeed -- most peculiar, mama." -- JL.
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