Apparently banks are sitting on the cash that the government gave them, because (unlike the Brits) Paulson didn't bother to set up a means by which he could ensure they don't hoard.
Krugman knows why.
Meanwhile, U.S. policy makers are still balking when it comes to doing what’s necessary to contain the crisis.And if you think that's bad, go read what he has to say about emerging markets, where the governments' care about not borrowing too heavily abroad is being ruined by the private banks' immense foreign debt. (So much for the Washington Consensus.)
It was good news when Mr. Paulson finally agreed to funnel capital into the banking system in return for partial ownership. But last week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash.
There’s also bizarre stuff going on with regard to the mortgage market. I thought that the whole point of the federal takeover of Fannie Mae and Freddie Mac, the lending agencies, was to remove fears about their solvency and thereby lower mortgage rates. But top officials have made a point of denying that Fannie and Freddie debt is backed by the “full faith and credit” of the U.S. government — and as a result, markets are still treating the agencies’ debt as a risky asset, driving mortgage rates up at a time when they should be going down.
What’s happening, I suspect, is that the Bush administration’s anti-government ideology still stands in the way of effective action. Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership.
Whatever the reasons for the continuing weakness of policy, the situation is manifestly not coming under control. Things continue to fall apart.
The Republicans and their various sycophants aren't having a very good time of it: witness Dick Morris screeching about "socialism". Their ideology really is creating problems.
And yet it's dying. There's a great post on Kos by Devilstower about "the death of John Galt": about how Objectivist ideology has suffered a deathblow from the current crisis. And not just from a theoretical point of view, either:
He (She?) goes on to point out that it's always been vaguely compelling nonsense—who doesn't want to be told that they're smart, brave, and independent thinkers who can be as selfish as they want?—but it's still nonsense. And if even Alan Greenspan is being forced to admit it might be "partially wrong", I think the rest of us can get the message.
For the next thirty years, Greenspan would cheer the deregulation of the S&Ls and join John McCain in trying to protect Charles Keating from regulators. He would praise the deregulation of energy trading, and assure everyone that companies like Enron were pointing the way to greater efficiency and lower consumer prices -- and collect the 2000 "Enron Prize" in exchange. He would urge not only the creation of credit default swaps, but applaud their lack of regulation and invisibility in the system. He would argue against oversight, against limits on CEO pay, and for the increasingly complex systems by which banks generated new instruments of credit.
No one person did more to spread Rand's message of unregulated markets, unconstrained free trade, and unlimited power for corporate officers than Alan Greenspan.
Then just this past week, his absolute faith slipped just a little.
Former Federal Reserve Chairman Alan Greenspan said a "once-in-a-century credit tsunami" has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.
"Yes, I found a flaw," Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. "That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."
For years, other economists had been predicting that the hands-off approach Greenspan advocated and the derivatives he praised would have disastrous long term consequences exactly because they encouraged short term risks no matter what the damage to the system.
Greenspan said he was "partially wrong" in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected.
For Alan Greenspan to admit to being "partially wrong" about market regulation, is like the Pope announcing that the church is based on a little white lie......Rather than reveal some ultimate truth of Objectivism, Greenspan's new revelations show only that for forty years, his indecipherable proclamations -- those Palinesque chains of detached verbs and adjectives -- haven't been the carefully-parsed parables of a financial oracle. They've been the nonsensical mumblings of a blind believer. Alan Greenspan may admit to being "partially" wrong, but he's wholly guilty of spreading a creed for which the hard evidence was always wanting. Far too many -- on the left as well as the right -- are guilty of believing it.
If there's one good thing that comes out of this financial disaster, let it be the end of the market fundamentalist.