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By: Market Forecaster, Sun Jul 25th, 2010
Obama is trying to prop up small business lending. But will it help sustain the economic recovery? There is not much Obama or anybody can do. The best they could do is do nothing and get the government out of the economy. Today's problems are not about what we are doing now, but what we have already done for the last 70 years. We have expanded credit to unsustainable levels. Now it is deflating. And we want to get sober with more debt. It won't work. It will make things worse after a brief calm.
Banks have been lending to the wrong borrower for decades. Since 1980s loans to the businesses have contracted, and loans to the consumer has expanded. Business loans are used to create value. They contribute more to the real economy. The likely hood that they will be paid back is higher. But consumer loans do not provide value. Consumers consume. They do not produce. Today, banks are 98% invested in consumer loans. The collateral for consumer loans depreciate in time. They do not create value. This is the cause of bank troubles today. 50 years ago banks would be invested in pristine US government bonds. If that was the case now, a housing market crash would not effect the banks much. Alas, it is too late.
Now, Obama is telling the banks to lend, after the damage has already happened. Banks are not in a position to lend! It is hard for the FED to turn the boat around because banks see this as what it is: A deflationary crash! Deflation is the threat now:
http://www.kondratieffwavecycle.com/economy/market-myths-exposed-inflation-is-not-a-threat-deflation-is/
1. FED makes credit available
2. Banks do not want to lend because they don't think they will get their money back.
3. Borrowers do not want to borrow because they don't think they can pay it back.
FED does not control the market. They cannot force people to borrow or lend. Eventually, free market forces will prevail. Action against the truth will dig our hole deeper.
http://www.kondratieffwavecycle.com/economy/the-federal-reserve-does-not-control-the-market/
So, what is the problem? Let them not lend, not borrow, no? NO. Because when we borrow, banks create money out of thin air and this money inflates the money supply. Without borrowing, deflationary crash happens:
http://www.kondratieffwavecycle.com/economy/deflationary-crash/
When we pay down debt it is deflationary but it is a necessary evil. Perpetual borrowing won't work because creditors will stop lending when the US looses it's credit rating. We are going into the Kondratieff Winter phase of Kondratiev Wave. Economic cycle does not favor business expansion yet.