Banks are currently holding Excess Reserves of more than $1,000,000,000,000, that’s a trillion dollars in cash. Excess Reserves are funds over and above those required to meet mandated capital requirements. In plain English, the trillion is money to lend. It’s inventory, the same way as shoes are inventory in a shoe store.
Shoe shops are in business to sell shoes. Banks are in business to lend money. That’s how they generate a profit. The banks have the inventory; why aren’t the banks lending it? For the same reason as a shoe stores when shoe stores don’t sell shoes. No customers.
Nobel Prize winning economist Gary Becker put it this way. “Corporate America isn’t borrowing because business leaders are frightened by the recent legislation”. The fright list includes:
- Higher cost of hiring due to new health care legislation. How much higher is still unknown.
- Likely increase of corporate taxes
- A Congress and an administration that wants to add a carbon tax on business, cost unknown.
- A Congress and an administration that wants to strengthen the power of labor unions
- A Congress and an administration that wants to reduce the spending power of consumers by increasing their taxes
- Disincentives introduced by government dictates on executive pay and use of corporate aircraft
- Rule of Law being replaced by regulatory discretion
In a recent interview Mr. Becker explained how recent legislation has been structured in a way that substitutes regulatory discretion for the Rule of Law. The result is a lack of a clear set of rules upon which a business can calculate the cost before adding employees and developing expansion plans.
Mr. Becker compiled his list well before November 4th. The election has taken the steam out of many of these fears. Give it a year and if the radical Democrats still look like they have lost control, business and the economy will begin to pick up. Oh yes, and if Europe doesn’t blow up, and if Bernanke’s plan doesn’t backfire.
RANDOM THOTS 