Spending Trillions to Break the Barriers in Lending, Will it work?

Interesting article from the New York Times on the present crisis in the US,

The Present Dilemma (all bold highlights mine)…

``Largely hidden from view is a vast financial system that serves as the banker to the banks. And, like many lenders, this system is in deep trouble. The question is how to fix it.

``Most banks no longer hold the loans they make, content to collect interest until the debt comes due. Instead, the loans are bundled into securities that are sold to investors, a process known as securitization.

``But the securitization markets broke down last summer after investors suffered steep losses on these investments. So banks and other finance companies can no longer shift loans off their books easily, throttling their ability to lend.

``The result has been a drastic contraction of the amount of credit available throughout the economy. By one estimate, as much as $1.9 trillion of lending capacity — the rough equivalent of half of all the money borrowed by businesses and consumers in 2007, before the recession struck — has been sucked out of the system.

The Proposed Solution…

``The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

``The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.

``But analysts question whether this approach will be enough to unlock the credit that the economy needs to pull out of a deepening recession. Some worry it may benefit only select investors at taxpayer expense.

``The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.”

My comments:

-This exactly is how crony capitalism takes root. Political dispensation from economic rent results to skewed incentives and bureaucratic corruption even without the guaranteed normalization of the credit process. The end result would be more inefficiencies in the ecosystem.

-Spending $1 trillion to the US economy won’t be inflationary?

``The very high inflationary trend that the country has been experiencing in the recent years is a direct result of, among other factors, massive money printing to finance government expenditures and government deficits.”

That’s the observation of Albert Makochekanwa of the Department of Economics of the University of Pretoria, South Africa on Zimbabwe’s hyperinflation model (as previously discussed in Will Debt Deflation Lead To A Deflationary Environment? and in Low Hyperinflation Risk For the US?).

In short, the restoration of the credit process isn't a sine qua non for inflation to be reignited, all it needs is massive money printing and subsequent government spending-the Dr. Gono approach. And Obama's policies seem to be taking us there.