US Treasury Secretary Henry Paulson said banks that received capital injections from the US government should start lending again in order to restimulate the US economy back towards growth. Paulson said it was important that banks started to increase their lending as a result of the various stimulus packages provided by the Bush administration, and that the availability of consumer credit had to be freed up. The US government has put US$250 billion toward increasing the capital of American banks and purchased preferred shares in 52 financial institutions. "We have implemented several programs aimed at improving the flow of credit to businesses and consumers, so they can spend and invest and restore our economy," Paulson said in a speech to a Fortune 500 forum. "Most significantly, we devoted US$250 billion to increasing the capital of our banks. A stronger capital base enables banks to take losses as they write down or sell troubled assets. Stronger capitalization is also essential to increasing lending which, although difficult to achieve during times like this, is essential to economic recovery," he said. "We expect banks to increase their lending as a result of these efforts and it is important that they do so." What I think The Northern Hemisphere's bank lending decisionmakers are like rabbits in the headlights with money stuffed in their mouths. They don't trust each other enough to lend to each other and are in full cash conservation mode because they know the de-leveraging tsunami sweeping the globe's property and asset markets has much further to run.
Paulson's lament betrays his impotence. The money being pumped into these banks appears to be disappearing into large black holes in their balance sheets. The ultimate conclusion for Paulson and others is that the world's central banks have to take over the lending themselves. That's exactly what Federal Reserve Governor Ben Bernanke is doing with his Commercial Paper buying spree and his recently announced plans to buy mortgage bonds. It all shows how much of a dead horse the Northern Hemisphere's banking system has become and how much Paulson and Bernanke are having to flog it. Will our Reserve Bank have to do the same? Not at the moment. Our banks have tightened up, but they are still lending to each other and businesses. Your thoughts? Comments below
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