McKinsey: Half the World’s Banks Too Weak to Survive Downturn

> Banks don't need those assets to make loans.

I agree with you on the endogenous theory of money (cf. Steve Keen), and understand that banks aren't constrained by 'loanable funds.' I was meaning capital and regulatory reserves, and mentioneing them only to acknowledge that not every dollar of the Fed's money creation went to asset price inflation. Just most of them.

> So the Fed and banks having 0 reserves or having 100 trillion reserves is nearly irrelevant - it is interest rates that matter, and those are set directly by the Fed board.

This is where I think you err. Once a bank's minimum capital requirements are met, its managers are going to look for maximizing returns on the capital available to them. To say that that will not have effects on the economy at large doesn't make sense to me.

> Also, if you recall, the banks were famously not giving loans after the bailouts, despite having the capital to do so [4]. I guess that also doesn't help your claims.

How so? Here are the chief claims I've made: > The 2+ Trillion dollar expansion of the Fed balance sheet during the crisis costs taxpayers every day that they pay interest on a loan enabled by that 2T+ expansion. > The core function of a bank is to evaluate risk. > Debtors have been defaulting for millennia, it's a well-understood process. > The financialization and securitization of housing was the creation of bankers, not borrowers.

I don't see how any of these are contradicted by the data in the St. Louis Fed 'Bank Lending During Recessions' article you linked. The entire investment world recognised that they'd underpriced risk for years, and there was a correction.

> If you're going that far afield,

I don't think this is far afield at all; I think it's critical to consider the effects of additional capital, in the form of debt, on the real economy.

> then it's simple to point out what financial trouble they would be in if the Fed didn't make those loans. People would likely be far worse, in which case it makes the argument for those loans even stronger.

Which people? The banks, yes. A creditor's assets are someone else's debts, so larger debts are good for banks. Generally borrower's situations are improved by brrowing less, at lower interest rates for a given asset.

> Here's [1] an IGM Forum economist poll of most of the country's top economists on whether or not the bailouts improved unemployment. I'd guess being unemployed is worse than claimed interest rate hikes.

Here are my favorite comments from the economists in that poll:

> There were much better policies, but what was done was better than nothing, give the bad policies that preceded.

> The question presumes Paulson’s forced alternative. If the only choice is between evil and Armageddon, evil might look ok.

From experience, being unemployed is terrible. Avoiding it on a mass scale is crucial. But avoiding unemployment is a pretty narrow question compared to the entire picture. Wages (real, median) have pretty much stagnated while housing (both a necessity and an asset) has inflated above historical norms (see Robert Shiller's chart from 1890-2005, and the Case-Shiller indexes.) That puts pressure on employed people that the poll question leaves out of consideration.

> Here's [2] their answer to the question: "the benefits of bailing out U.S. banks in 2008 will end up exceeding the costs" - resulting in strong support with certainty (especially considering the types of questions these polls ask - check other questions).

First, I note that the number of economists who strongly agree is outnumbered by the group who are uncertain or disagree.

> Now that the Fed is selling off MBS [3], shouldn't that cause the reverse of what you claim absorbing them did? Because those effects are not see in the markets. Maybe your effects did not happen?

There's been a ~10% decline after a ~400% increase. How much of an effect would you expect to see?

Lastly, my favorite comment from the second pol:

> Not compared to an ideal policy of an orderly reorganization imposing losses on creditors according to seniority. But better than chaotic.

He sort of sounds like Bagehot, "“Lend without limit, to solvent firms, against good collateral, at 'high rates". The choice that was made was to lend without limit to the largest firms against all collateral at low rates. That choice has consequences as well as benefits, and I would urge you to seriously consider both.