November 30, 2009

Two data points, one conclusion...

First off, more people were out shopping on Black Friday this year. However, on average they spent less than last year. Not the end of the world and aggregate sales should be higher... but it paints a grim picture of a still distressed consumer.

Next up, banks are taking cheap money from depositors and the Fed and then investing it in US Treasuries. Why? Well, banks survive off fees and spread income. Spread is the difference between what banks pay depositors (or the Fed) and what they get in terms of a return on the money they lend. Since they are essentially paying 1% or less to depositors, they can make a risk free return by investing in long term Treasuries at 3-4%. It's easy because for the foreseeable future, there is no reason for banks to expect short term rates to spike higher which would destroy the spread.

So what to do? One idea is to jack interest rates to 2% which would keep them low and 'force' the banks to stop with the treasury trade. Of course, what it would really do is drive up longer term rates which would stifle the recovery in housing and equities destroying what little of the wealth effect has been rebuilt. So, in other words, that's a stupid idea.

What we need to do is nationalize one of the big banks and Geithner needs to let the others know, in no uncertain terms, they're next if they don't start lending to consumers and businesses. Only then will they finally act to restore credit to the economy.

Posted by mcblogger at November 30, 2009 03:41 PM

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