Wednesday, March 26, 2008

Hoarding by banks?

So now it seems the central banks are angry that they can't get banks to lend, in spite of the Federal Reserve's recent rate cuts and newfangled lending facilities.

For some strange reason (like, I don't know, fear of insolvency?) banks and other financial institutions don't want to make a bunch of new loans in the midst of a steadily worsening credit crunch.

Here's how the FT put it: "Hoarding by banks stokes fear over crisis".

"Central banks' efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.

Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, eurozone and the UK rose again even after the Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe."

I see the word "hoarding" coming into play here, as it always seems to when demagoguery is the order of the day.

In this instance, it's the banks who are fearful to lend, and are now said to be hoarding cash. The implication here is that they should stop being so miserly and start lending like crazy again.

But is it wise for banks to start lending again at a time when the whole financial sector is trying to shrink its exposure to risk? It looks like the Fed and other leading central banks are hoping to pump the system back up with liquidity and keep the "good times" going at all costs.

So what we have is a battle between the central banks, who want to keep money and credit conditions easy, and the private sector, which wants to retrench and tighten liquidity.

For a more detailed examination of this idea, see our recent post, "Can't get a loan? You're not alone".