Banks Sitting on a Mountain of Cash. Why? Fear of the Unknown --- Future Government Regulations

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Is Obama the new FDR? Seems like it to me. Both believed that unelected bureaucrats from Ivy League schools knew better than individual people how to run their businesses, their lives. But, FDR's cenral-planning policies not only did not work but created a depression within the depression. (In 1937, unemployment had reached 22.5%.) Obama's policies will prove just as futile and even negative. I see this as another battle between the private sector and the public sector, as was the case in the Depression of the 1930s. The public sector won. Only Obama is much better at excoriating his opponents (actors in the "private" economy) than FDR was. 

I fear we might get policy wonks runamok (well, we already have but it might get even worse), creating all kinds of new regulations that will further dampen economic growth. (Just think of Dodd-Frank: 237 new rules have been written with a couple hundred to come!) Anyway, politics is not good for business. In today's New York Post, our long-time contributing editor John Aidan Byrne writes: "Thanks to fears over government regulations, there's a massive $1.46 trillion treasure chest sitting idly at the Fed, excess reserves from skittish U.S. banks." That treasure chest, Byrne's sources say, is expected to swell to $2.6 trillion in the next year. What a poor use of capital. Such idle cash --- earning 25 basis points in interest --- is a waste. Call the resevers the "stash of fear." Idle cash does not get put into play in the economy, which desperately could use a boost. It's a shame banks are not making loans, as they are the fuel for creating wealth (i.e. business loans, mortgage lending and etc.)  

More from the Byrne's article today: "The rise in the excess bank reserves is spectacular. In 2008, there was only about $2 billion in reserves at the Fed before the bank bailouts."Imagine what the economic machine could do with even a smidgen of that? 

It cannot be overestimated what a drag fear of regulation is on job creating and economic growth. And that fear is justified. Here is John A. Ellison, former CEO of BB&T Corp. and now head of the Cato Institute, has to say in his book, The Financial Crisis and the Free Market Cure: "The biggest myth is that since the crisis (2008-2011), bank regulators have been encouraging banks to make more loans. In fact, bank regulators have been making it far more difficult for banks to make loans, even though the heads of the banking regulatory agencies are saying that they wan banks to become more willing to make loans."

Amity Shlaes, a columnist for Bloomberg and an expert on the economics of the 1930s, describes just how bad political uncertainty is on business leaders and therefore the economy in general. During the New Deal, companies hoarded cash for fear of what FDR was going to do next. Shlaes told me in an interview back in 2009 that business were hoarding so much cash, FDR created the unearned income tax. He was frustrated and was trying to shake money out of private hands and into his economic programs. Here is the intro I wrote for a Q&A with Amity for our Gurus column

If President Obama is truly a new kind of FDR — arriving on the scene to “save” the American economy from itself — then he would be wise to read Amity Shlaes new-ish history of the Great Depression, The Forgotten Man (HarperCollins, 2007). In the book — a surprisingly fast-moving narrative for such a leaden subject — Shlaes points to about a half-dozen major mistakes that Hoover and FDR made in trying to “correct” the struggling economy of the early 1930s.

Critics of Shlaes will point to her libertarian leanings (she is also the author of The Greedy Hand: How Taxes Drive Americans Crazy And What To Do About It (Mariner Books, 2000), and dismiss the book as mere revisionist history. Yet few on either side of the aisle would disagree with the argument that Shlaes helps advance: The central-planning-like policies Hoover and FDR put into place — trade-killing tariffs, increasing labor costs, price setting and other well-intentioned but nonsensical laws intended to stimulate economic growth — took an economic downturn and turned it into a decade-long depression.

In Shlaes' book, there are two forgotten men: One is the tenant of Hooverville — the starving, neglected individual at the “bottom of the economic pyramid,” in FDR's words. The second is the fellow who did have a job, maybe a small one, but struggled along for a decade waiting for New Dealers' policy magic to create an economic recovery that did not come. Shlaes, a Bloomberg News columnist and a senior fellow at the Council on Foreign Relations, argues that the New Deal led to the special interest groups and pork barrel spending we condemn today. The Forgotten Man does show that the 1930s was the decade in which the struggle between the public and private sectors raged — and the public sector prevailed. “Before the 1930s,” Shlaes writes, “the word ‘liberal' stood for the individual; afterward, the phrase increasingly stood for groups.” 

Please click here for the interview.

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