Can Making Banks Balance Sheets Look Good “Fix” the Economy?
Recall that Treasurer Paulson and the Fed chairman are of the view that once banks’ bad assets are removed, the banks are likely to move ahead and start lending. We suggest that making the balance sheet look pretty is not going to alter the essence of the problem, which is the poor state of capital and savings to support such high lending activities. The essence of a sound credit market is not lending money as such but lending the real stuff that people require by means of money. Without the real stuff – the preceding savings and subsequent productivity to fund the lending – no lending is possible. Decades of nonproductive consumption (consumption that is not backed up by production) that emerged on the back of loose monetary and fiscal policies have severely damaged the store of wealth that serves as the foundation for credit markets. If this is the case, it will be futile to try to boost lending by pushing more money into the banking system. More money cannot generate real wealth. If
