For about a year now, the Fed is pushing more and more money towards banks, but even a trillion and some dollars later, nothing seem to have helped. Sure interbank landing rates came back a bit from the record values we saw before, but they are still much higher than they should be. More important lending to even good real economy companies has slowed to a crawl.
One reason is the counter intuitive Fed policy. To somewhat sterilize the expansion of its balance sheet the Fed is now paying interest on the reserves banks keep with it. The result:
Last week, banks were sitting on about $800 billion in excess reserves with the Fed, doing absolutely nothing with them.
But the real issue is trust. Some banks are insolvent, but we do not know which one is or which one is not. The Fed and the Treasury repeat the mistakes made in the 'lost years' in Japan where insolvent banks were kept alive until, six years into the crisis, then economics minister Heizo Takenaka got one thing right and finally forced them to come clean and write off their bad assets. Sweden did the equivalent when it nationalized the banking system, eliminated the shareholders and forced the banks to write down bad debt and to restructure before returning them to normal business.
As I wrote before when I demanded Declare All Credit Default Swaps Null And Void trust is the important issue and there is only one way to get it back.
As Ilargi says:
All of the money spent so far, all the trillions, every penny of it, will be a complete waste if these [toxic] assets are not forced out of their closets. Everybody talks about the need to restore markets by restoring trust and confidence. Well, Mr. Obama, here is your key to reviving that trust. Find your own Elliott Ness, this one specialized in derivatives, get him the people he wants and needs, and start raiding the banks' vaults, and the hedge funds, and the pension funds. Force it all out into the open. Refuse to give them even one more nickel, until all of it is on the table. All of it, not just some of it. If that doesn't happen, the US economy will not recover, because there will be no trust and no confidence."
Gloomy as s/he is, Ilargi looks at Obama's advisers and does not expect this to happen. Maybe it will take six years?
There is now some prominent support.
Wolfgang Münchau comments in the Financial Times (reg.req.):
I am sceptical about the benefits of the Fed’s new policy of quantitative easing. We do not have a liquidity crisis, but a solvency crisis, which expresses itself in large spreads and dysfunctional money markets. I cannot see how adding more and more liquidity to the system solves this problem.
Instead of propping up each bank, and swamping the market with cash, we need to restructure and shrink the banking system, as a first step to a sustainable solution to this crisis. Quantitative easing without deep structural financial reform could cause lot of trouble in the long run.
In Japan Takenaka was perceived by some as a puppet of 'western' economic advisers because many 'western' economists pushed with him for writing down bad assets and bank restructuring. Now Japanese economists make the same case for the U.S. But I see little push by their 'western' colleagues.Why?