CommunityLend blog

In a coordinated move the Governor of the Bank of Canada (Carney) and the Federal Finance Minister (Flaherty) have come out using identical wording “It is not clear to me that they need additional capital buffers,” and insist that the banks turn lending back on, particularly for businesses who are having difficult finding access to lending from the Banks.

Flahery warns Banks on lending | Globe and Mail

“It is not clear to me that they need additional capital buffers,” he said of the banks during a meeting with the editorial board of The Globe and Mail. “What is clear to me is that there is unfilled demand for credit for worthy investments, and I’m sure that our banks will see these opportunities in the fullness of time.”

The federal government is buying $75-billion of mortgage securities from banks to help them expand their balance sheets and pledged to backstop their sales of wholesale debt. The central bank is offering billions more through short-term loans to financial institutions hurt by the credit crisis.

Mr. Flaherty made clear he doesn’t think the banks are showing enough gratitude.

and yesterday:

Carney to banks: Lend, don’t hoard | Globe and Mail

TORONTO — Mark Carney is pointing a finger at the country’s big banks for hoarding capital against a rainy day instead of doling out more loans, a choice the Governor of the Bank of Canada says is damaging the economy.

…

Worries about companies’ struggles to get loans emerged as one of the biggest risks to the economy at a meeting between Finance Minister Jim Flaherty and his provincial counterparts yesterday in Saskatoon.

This introduces a dilemna for the Governent that was well stated by the famous economist J.M. Keynes nearly 90 years ago.

The Paradox of Thrift | Economics Professor

Paradox of thrift was revised by English economist John Maynard Keynes (1883-1946) in the 1930s, who asserted that thrift is virtuous only up to a point. If an individual increases the proportion of income he saves, his reduced expenditure on goods will lower total demand in the economy.

Simply put, when peoples confidence is unsettled their natural reaction is to batten down the hatches,  save, pay off debts and prepare for the future.  In turn this reduces the size of the economy and reduces value for everyone.  It becomes a vicious spiral.   It is interesting that the communication effort to Banks is focussed on helping businesses, presumably because business confidence is a necessary precursor to consumer confidence returning.

GDP is made up of spending by 1. Business, 2. Consumer, and 3. Government plus 4. net exports.  The thinnking of the government is that with confidence for 2. being in the ditch, they must do all they can to avert 1. (business) confidence dropping so much.

All this coming at the time when banks consider they need to re-capitalise in order to save for future loan losses including the likes of the Maddoff affair coming out of the woodwork, and they are betting there has to be more to come.