Kiss the Banks Goodbye and Refocus on Rebuilding the American People

By Dave Lindorff

The futility and stupidity of the Fed’s and the Obama
administration’s policy of pumping ever more money into failing banks
and insurance companies in a vain effort to get them lending again was
demonstrated—if anyone was paying attention—by the collapse in auto
sales this past month, with all the leading companies, Ford, GM and
Toyota, reporting sales down by about 40%.

This fall off in car buying was despite record discounting by the auto industry, and offers of 0% financing.

Clearly, obtaining financing is not the reason people are not buying cars.

People are not buying cars because they are worried about having a job to enable them to pay back the loan.

It’s the same reason people aren’t buying houses. It’s not that you
cannot get a mortgage. There are plenty of smaller banks that would be
happy to lend money to buy a house these days. But who’s going to go
out and buy a house in this economy? First of all, to buy a house,
unless you are a first-time buyer, you have to sell your current house,
but that would mean taking a huge loss. Indeed, one in five homes in
America today is technically “underwater”—that is, it is worth less
than the outstanding mortgage on the property. Probably another one in
five are worth little more than the outstanding mortgage. No one would
sell a house under either such circumstance.

The point here is that if people aren’t willing to spend money,
then what good is it to give more money to banks and their
shareholders, in hopes that they will start lending it? The lending
business has two sides—those offering to make a loan, and those wanting
to borrow. If there’s no borrower, no amount of money available for
lending is going to change the fact that there will be no loans written.

Commercial lending is not that different in this regard. Companies
generally borrow money to expand. You don’t need to borrow money when
your business is shrinking, unless it is to try and stave off collapse.
What a company does when its markets contract and its sales and
earnings fall is it cuts back on production and lays off workers. It
doesn’t need to borrow money to do this. Of course, if sales collapse
too fast, the company could be caught owing back wages to workers.
That’s true. And in that case, a company might want to borrow in order
to meet its obligations, but that’s hardly the kind of loan a bank
would want to make—to a dying enterprise unable to meet payroll.

Business borrows when it is expanding, because that’s a great
investment. If you know that you can earn a 15% return on your
investment in a period of economic growth, and you can borrow money for
expanded production at 4%, that’s a great deal. It’s also a great deal
for the bank, since lending to a company that is expanding is a pretty
low-risk proposition. The central government wouldn’t have to press
banks to lend to such companies. The banks would do it on their own.

So, with the economy still in free fall, with companies laying off
American workers at a rate of over 20,000 per day, with real
unemployment soaring past 18 percent—one in six American workers are
now either out of work and looking for a job, out of work and giving up
looking, or involuntarily working part-time—and with family wealth more
than 50% eroded away, there is simply no way that Americans are going
to turn around and start borrowing and spending again. And given that
the American economy is 72% composed of consumer spending, there is no
way that the economy is bouncing back anytime soon.

That means that the hundreds of billions of dollars that are being
poured into the likes of Citibank and AIG are being completely wasted.
It is simply a pointless and scandalous transfer or wealth from the
American public to the shareholders of these companies—the very
companies and people who caused this catastrophe in the first place.

It’s time to put a stop to this farce.

Restoring the American economy is not going to be a matter of
simply jump-starting consumer spending, or even business investment.
It’s going to take a long, hard, focused effort to move away from a
parasitic consumer economy in which profits are largely made through
speculation, and towards a real economy that actually makes things that
people both here and around the world need.

The sooner this truth is recognized, the more resources the
government will still have left to put into the kind of investments
that can help make that happen—things like job creation, income
supports, home refinancings and medical system reform that could help
Americans get back on their feet. Of course, it would also be necessary
to end the wars overseas and to dramatically slash military spending.

When former companies like Citicorp and AIG are history, and when
former Lehman Brothers, Citibank and AIG managers, as well as most of
the Pentagon Brass, are out working at civilian conservation corps
camps helping to restore watersheds or replant forests, we will know
that the government has finally “gotten” it.

DAVE LINDORFF is a Philadelphia-based journalist. His latest work is
“The Case for Impeachment” (St. Martin’s Press, 2006). His work is
available at www.thiscantbehappening.net