Banks are being paid to NOT LEND!

It’s a funny old world just now!

The President of the United States recently pressured the heads of the nations’ largest banks to increase lending to

Pres. Obama

small business and home-owners.  Obama claimed that the banks, as recipients of federal bailout funds, had an unusually heavy responsibility to take such measures in order to create more jobs and help nurse the economy back to health.  All of this was done very publicly and with much fanfare.  Worldwide press coverage was universally favorable.

Seems reasonable, doesn’t it?

But it is not.  You are being duped.  I can’t tell whether whoever writes this stuff for Obama knows the truth and skilfully skirts it, or just writes flowing prose with no connection to the truth that curries voter buy-in by blaming Wall Street and Corporate America for all that’s wrong in the world.

First of all, the Federal Reserve is now paying banks to not lend. You heard that right:  the US Federal Reserve is paying banks interest on both their required reserves, which are portions of deposits they are required to retain, and their excess reserves, which are deposits the banks could lend but haven’t.  Here’s the opening paragraph of the press release:

Release Date: October 6, 2008

For release at 8:15 a.m. EDT

The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions’ required and excess reserve balances. The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee.

Historically, the cost to banks of holding excess reserves has been the interest they would have earned if they had been lent.  Banks hold excess reserves as a sort of cash management tool; insurance that if the bank manager misjudged their customers’ demand for cashing checks, for example, the bank wouldn’t hit the headlines as the first bank since the Great Depression that “ran out of money!”  But that insurance cost them.

Now, the Federal Reserve is paying banks to hold excess reserves.  They are paying banks to not lend, while President Obama scolds them for not lending!  Either he doesn’t know about the Fed’s new policy, doesn’t care, or doesn’t understand. I frankly don’t know which is worst.

Secondly, how is increased lending supposed to create new jobs?  Bear with me here, because the bold, brash economic truth of the matter is a bit more complicated than the press coverage and the teleprompters would have you believe.

Profits enable growth: income growth, job growth, wage growth, new businesses, more choices, and a higher quality of life.   Profits are created when a business hires labor and buys or rents physical capital, combines them using processes, software, expertise, creativity, and risk-taking, and produces a product or service that a free society chooses to purchase. There is simply NO other way to create profits.

Now you need both a business to make the good, and a customer to buy the good, before you have profits.  But increasing demand alone does not create profits or jobs.  The way to see this is to imagine that we were at capacity output right now: increasing demand would simply increase prices, not output or jobs.

Lending to businesses – assuming they can generate enough cash flows to pay the interest charges — fuels their demand for productive capital.  But the capital could sit in the corner gathering dust.  It is the profit motive of businesses – what they choose to do with the new capital that the lent dollars enabled – which incents business to hire more labor and produce more efficiently. Not a scolding from the President.  Particularly a President who has made it clear that he believes that “now is not the time for profits”; that the greed and excess of fat cats on Wall Street led to the financial crisis ; and that insurance companies take advantage of Americans.  Not a President who presides over a Congress which is spending at record rates and raising taxes on business at every turn!

By Sherry Jarrell

9 thoughts on “Banks are being paid to NOT LEND!

  1. There is a possibility of a change to more local banking. Local banks, run conservatively, did not suffer as the big ones did as many of them stuck to proven methods. So, what does that mean to us? 1. use local banks or better yet, credit unions. 2. use cash or debit cards, not credit cards. and, 3. don’t fall for the credit score thing-it’s only a measure of how you mis-manage your money. a perfect score is “0” and if you have a credit union or local bank and you can show income and savings I think you will find it works very well. this could be “the time for profits” for all of us if we refuse to participate in the games this president is playing. Don’t buy what you can’t afford.


    1. Here here!

      All banks should act like local banks. The big banks that acted like local banks, like BB&T, are doing well; they did due diligence, know the borrowers, know the local economy, and have a vested interest in its growth and success.


  2. Hi Sherry:
    Glad to see that we thoroughly agree on that one.

    Why should the private banks lend to private individuals, indeed? As I pointed before, getting money at 0% from the Fed and then putting it back with the Fed to earn 3.5% beats anything: zero work, zero risk, potentially enormous profit if the Fed send trillions. As it seems it did. But we don’t know all the details: ever since the central bank of central banks, the Bank Of International Settlements (BIS), founded in 1930 by the plan Young, did dirty business with the Nazis, it is safe and traditional to not ask too many questions to central banks.

    The BIS was not audited in 1945. That would have been interesting. All top financiers know this, and thus know that really big banks are not just too big to fail, they are too big to fault. They can get away with holocausts. Thus, they act accordingly.

    That is why it would be a democratic progress to audit the central banks. It is even a democratic necessity. If central banks and their associated private banks can get away with financing Hitler, and this is never even questioned, we have a serious problem with our democratic facade.

    As it is, with a reserve requirement of 10%, the private banks can expand the monetary supply from the monetary base (what the central bank gave) through the multiplier, ten times over. That money they are supposed to lend to the real economy. Such is their fiduciary duty, because, really, private banks operate at the behest of the government, through the central banks.

    Except that, apparently US private banks have decided now that they are the government, with the help of, um, the government, as described above.

    Another “socially useless” way banks use the money they are allowed to create, is by investing in derivatives. This is not a small problem. The private bank JP Morgan, let by Jamie Dimon, that Obama called “his friend” has a 80 trillion dollars derivative portfolio. World GDP is about 50 billions, namely, less. All together the derivative market is at least 16 times world GDP. That is as much money supply that will not make it to the average entrepreneur, worker, retired person, or sick, uninsured patient.

    An even more ominous possibility is that the derivative trading is rigged, as the government, and its pet, the Fed, could easily telegraph the correct trades to their friends (see the use of the concept of friend, above.) Another reason to audit the activities of the central banks. Obviously since many at the White House, or in Congress, have been, and will feeding at the trough of private banks, their motivation for violating the sacred trust of the People is obvious.

    It was risky of government to engage in fractional reserve banking. The theory was actually started in France, in the eighteenth century, by the physiocrats (the teachers of Adam Smith). It is high time for the French to denounce their own baby. (Ironically, Great Britain used private bankers and the multiplier , through the house of Rothschild, to finance its wars against France, winning the first and third, but losing the second, the one that gave rise to the USA.)


    1. Patrice,

      Either you misunderstood what I said, or you are trying to put words in my mouth. My point was that the Obama Administration is being hypocritical: while wagging their fingers at banks for not lending enough, they are quietly paying them to not lend as much. All for a public show. All to point the finger of blame to someone else, anyone else. It is childish, and deceitful, and it insults the intelligence of the U.S. public. I simply want President Obama and his advisors to take ownership of their policy decisions — all of them, whether good or bad.

      Banks should lend. It is a good thing. It is not a racket, it is not evil. Derivative trading is not rigged. There is no conspiracy. The cause of the financial crisis is much simpler than that. The truth of the matter is fairly boring, apparently way too boring for the fertile imaginations of the world.

      The fact that the system has fractional reserves is a mere detail; 100% reserves would simply mean that the Fed has more direct control of the money supply. Either way, the Fed controls the money supply.

      The money supply, by the way, is distinct from the equilibrium quantity of money, which occurs at a particular interest rate given money demand. So the Fed either targets the interest rate (and allows money supply to rise or fall as needed to maintain that rate), which it now does, or it targets the money supply (allowing the market interest rate to rise or fall as needed, as we did under Volcker in the early 1980s).

      So, our “thoroughly agreeing” on something, I’m afraid to say, was a false alarm!

      On another subject, may I ask the nature of your physics training? I know that’s fairly presumptuous of me, but I get the feeling you can handle it. Thanks.



      1. The nature of my physics training? That’s a funny one. It would be better to ask the nature of my philosophy training: thoroughly rejecting the principle of authority.

        Anybody who has had a few years of physics training ought to be able to tell that the nature of my training in that matter is fairly advanced.

        The real mystery is somewhere else.

        Anyway, I do agree that the adminstration is deceitful on that point you mentioned. That you believe that derivative trading is not rigged is just beyond belief. You are no doubt trying to amuse me as a Xmas gift. I may have no formal training in finance (although I do in physics), but I have heard of AIG, Goldman,CDS, etc… I do agree that what I say in finance is not common, but as Volcker said, I will win… Enron, Worldcom, etc… Anyway, my baby is crying…


  3. You dodged my question on the nature of your physics training. Why is that? You offer instead the assertion that your training is “fairly advanced” and “formal” (but not without first trying to discredit the one asking the question). To quote you, “It is not just because one says something that it becomes true.” So, are you going to stay true to your own words, and clarify when and where and under whom you learned physics, and what you mean by formal training, or do I continue to assume that you are in part self-taught?

    The rest of this particular comment warrants no serious response on my part. Hope the baby’s okay.


    1. Please continue with what is obviously in your world the implicit disparaging of assuming that my training in physics is “part self taught”, that is fine with me.

      In economics in particular, there have been enough idiots with PhDs taking enormous decisions for decades, all of them perfectly stupid. The good PhD, Dr. Greenspan, the “Maestro” being a perfect example. Now Doctor Greenspan recoginzes he was wrong all along:”Markets do not self regulate”, he NOW says.

      All and any creative mind, in all and any field, is part self taught. Only parrots are completely taught by someone else.

      The authority argument consists in saying that one is endowed with a particular aura, because of where one comes from, instead of being endowed of the value of the arguments one uses. It is easily turned into tribalism, racism, and anti-multi culturalism.

      I posted a long comment on WIMPs attached to a post of Paul, and a reinforced version on my site.

      Interestingly, the New York Times posted since something much less advanced but nevertheless a bit similar in spirit.

      Here is the conclusion of that article, which reflects the spirit of humility I am trying to promote:

      “But Dr. Rubin, who likes to stick to the facts, refused to be excited. “I don’t know if we have dark matter or have to nudge Newton’s Laws or what.”

      “I’m sorry I know so little; I’m sorry we all know so little. But that’s kind of the fun, isn’t it?”

      This is found at

      It would be nice, it is even necessary to promote the same spirit of humility and mental inquisitiveness in finance. It does not matter if one has been trained by a “Nobel” prize winner or not. Plenty of Physics Nobel Prize winners advised Hitler (Philipp Lenard, author of “Jüdische Physik”, a four volumes opus, or Johannes Stark)

      What matters in intellectual prowess is not where one comes from, or under whom, or where one is going, but whether one is right or not.

      Simple, but tough.



  4. Wow. Dismissing all of economics and most of finance, all the while preaching the “spirit of humility,” right before concluding that what really matters is whether you are right or not. My head is spinning!

    I did see your WIMPs comment and I read it, but when parts were unclear I asked a couple of friends to have a look. One has a physics background. When they, too, were unlcear about what you were trying to say, I asked you about your background. Forgive me if you found that offensive, but I am a teacher and when I can not understand what someone writes, it often helps me to understand how they think which in turn is informed by the source of their exposure to the material. That’s why I asked. I was curious; I was interested.

    I have seen your comments about background and pedigree not mattering. I do understand what you are saying and in many ways agree. But then the onus is on us as writers to be very clear and communicative and correct. And, I’m sorry, but I often cannot tell where fact ends and opinion begins in your posts on physics.

    Simple but tough? I doubt either of us are all that tough. I think we are both softees who love our respective fields and want others to share our passion.


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