You can lead a bank to liquidity, but you can’t make it lend

Andrew Ross Sorkin in the NYT:

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Why Banks Won’t Lend — My Theory (Baseline Scenario):

A CEO with a $5 million base salary who knows this year is going to be terrible and that he won’t get much of a bonus has no incentive to increase profits. He does have an incentive to make sure his bank stays in business – so he keeps getting that base salary – which means being as conservative as possible with cash. He also has no desire to go bankrupt and get hauled in front of a Congressional hearing (motivation #2), which again means being as conservative as possible.

He has a point.  And the solution is obvious: Negative bonuses.  (Half-joking. Probably better than nationalization, though.)

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