Commentary on China with an economic flavor

Steve Randy Waldman says:

The most organized and active agents of the rentier class are, of course, banks …
But it didn’t have to be this way. Banks, after all, are not only creditors. They are also the economy’s biggest debtors. In theory, bank loyalties ought to be mixed…On the one hand, banks prefer deflationary, zero-forgiveness tight-money policies, to maximize the real value of their assets and of the lending spread from which they draw profits and bonuses…

On the other hand, troubled banks are very happy to support loose money and expansionary policy, even at risk of inflation…

When we committed to a policy of “no more Lehmans”, when we made clear via TARP and TGLP and the Fed’s alphabet soup that big banks would have funding on demand and on easy terms, when we modified accounting standards to eliminate the risk that bad loans on the books would translate to failures, when we funded their recapitalization on the sly, we changed banks. We transformed them from nervous debtors into pure rentiers, who see a lot more upside in squeezing borrowers than in eliminating a crippling debt overhang.

This analysis seems wide of the mark to me. Where is the evidence that banks are among those pushing for deflation/austerity?

Even considering only traditional banking activities — in a slump, surely banks holding significant numbers of mortgage and loans worry more about credit risk than inflation / yield curve risk? Even if the government has sworn to protect bank creditors (the meaning of “no more Lehmans”), that doesn’t mean their equity can’t be wiped out.

And our biggest megabanks (the ones who are “organized and active” in the political system) are even less likely to support monetary or fiscal austerity. These banks earn a very significant portion of their revenues from highly cyclical investment banking activities.

Brad Delong made the point (in response to a Krguman article) last fall that there is no natural domestic hard money lobby nowadays. I agree. Today’s hard money lobby consists not of rentiers in the usual sense, but an axis of foreign creditors and opportunistic politicians.


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