2) Fed Funds rate too low. The FED created too much money and surpassed its 1% target. Inter-bank loans are now being made at .13%. I would assume their volume has gone down, as banks are more likely sitting on reserves than loaning to each other.

3) Risky Market. Increasing unemployment, still-falling home prices, rising consumer credit delinquencies, etc. all point to higher lending risks.

4) Unprofitable Market. What’s making money right now? Where would you loan money? Exactly. Just as people are sitting on money or seeking safe assets, banks are doing the same.

5) Unknown future losses. Banks know losses are coming (although not the quantity and precise dates), and they’ll need cash to cover. Why loan out this cash now, if you risk having to pay more borrowing it back when necessary?

The banks are doing the only logical thing they should right now. They are avoiding risk, shoring up cash to cover losses, and making money at the same time.

Bank profits largely come from fees, not from warehousing loans. Banks do warehouse loans, but the loans held in their portfolio are cherry picked and the portfolio is carefully managed. Without a secondary market for loans, a banks’ ability to manage its portfolio of held loans is impaired and their portfolio is quickly filled. In addition, as others have noted, in a downturn banks seek to hold fewer loans.

Banks aren’t lending money because the consumers and small corporations with the ability to re-pay are loathe to take on debt given perceived job insecurity. The slow down in consumer spending is evident, it’s just delayed in some sectors, specifically education and health care.

I work for a residential lender. The only deals coming in the door are crap deals, deals the originating lender would never contemplate holding in portfolio.

So now that you know where my sentiments lie … my concern with regulatory schemes to limit executive compensation is that I don’t think they will work, as long as the buyers (the people hiring the executives) have misplaced ideas about what individual executives are worth. Two things will happen. First, talented people will leave the industry. (Now, in the unique case of financial services, this might actually be a good thing, because you can make a strong case that too large a proportion of our smartest, best-educated people are going to Wall Street.) Or, more likely, they will go to the less-regulated parts of that industry – is anyone suggesting regulating hedge fund compensation? is it even possible, given that these are private companies? For example, I don’t see any CEO signing up for possibly negative bonuses – unless you give him a much higher base salary, which just amounts to the current situation.

Second, whatever scheme you come up with, people will get around it. Remember expensing stock options? Well, we ended up with restricted stock grants. Limit the deductibility of compensation? The compensation will flow into different forms. For example, large banks will figure out a way to pay their executives through their subsidiaries in Bermuda. (I have no idea if that is feasible, but I’m something similarly outlandish is.)

More broadly, though, my point is less about CEOs themselves than about the broader problem of misalignment between the incentives of shareholders and management. Broadly speaking, I think reforms that give activist shareholders more input into their companies could help.

Is this a rational belief? Mmmm…. could be. The US has very large and rapidly increasing debts of all kinds. Let’s simplify and assume the Federal government takes over all failed debt in the US. To maintain this debt the US can do one of three things: it can print money to pay the debt; it can default; or it can raise taxes by a very large amount.

Printing money is the most likely scenario. But this would result in extremely unpredictable economic effects. Some people are going to be able to change these vast sums of green paper into vast sums of some other color paper. Others are just going to end up with lots of paper and little profit. But why lend to people who might (or might not) be able to change future dollars into future gold when you (a large bank) can just take the dollars you have now and change them into gold…. now?

Defaulting on the debt would also have unpredictable effects. How would it even work? Private pensions and health care will fail if their bonds become worthless. And the government then has to take over those pensions. Since we are running a large deficit now, the only way to fulfill our obligations would be…..

Raising taxes. The government’s obligations are large and growing rapidly. Closing out rapidly increasing deficit would require draconian tax increases. Who would end up paying these tax increases? Well, basically the only businesses who can pay increased taxes are those who are making a profit. And draconian tax increases will obviously mean that they are making a lot less profit. A LOT less.

So, very likely, no one is going to be making good profits in the United States in the next few years. If they do, the government will take their profits to…. give to banks now.

What the government is doing is taking out a loan from Main Street to give to Wall Street. Why would you expect Wall Street to turn around and lend it back to Main Street? How can Main Street possibly make a profit lending themselves money?

It is true that in certain banking businesses, fee-based income is increasing relative to traditional interest-spread income. Credit cards are one example. Again, however, in order to get those fees, you have to lend money. You can’t charge fees to your credit card customers if you aren’t willing to lend them money in the first place. If you want to start a bank that just takes deposits, charges your depositors lots of fees, and invests the money in Treasury bills, I don’t think you’ll stay in business for very long.

“banks ONLY make money by lending money” ? You must be kidding! Isn’t this crisis about the way banks invested thier customers’ money in order to obtain higher returns? And what of the fees banks are charging their own customers for transaction costs? Say an average customer performs between 50-100 transactions per year, and suppose a bank has a customer base of 10,000,000 customers: wouldn’t you like to make a transaction commission too? That is not counting other relatively banal things like sending a wire – which can cost up to $50 dollars and take up to TWO WEEKS. In mainland Europe or Asia this is an overnight transaction.
The US banks had better keep their eyes open. A major European player is coming to the US market. It has has better technology, it is well-structured, it is agressive and it charges no fees to its customers. Already it is strong on three continents…

The future will be exciting if we are able to build a world of “scale-free, distributed power” instead of Persian, Greek, Roman, Spanish, British, American or (Chinese?) Empires. The former will prove to be far more resilient to change and will evolve better.