Politicians are upset that banks participating in the capital injection program are paying dividends rather than lending more (via WaPo):

U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.

The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don’t serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends — or conversely, why banks that need government money are still spending so much on dividends.

“The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program,” said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.

Okay, let’s review. Hank Paulson, in his best godfather imitation, called the heads of the 9 families…er large banks to Washington and made them an offer they couldn’t refuse. Accept this money and do your patriotic duty they were told. Apparently, Paulson and his political enablers believed this money would be lent out to worthy borrowers, but they didn’t include any mandate to do so. And what if there aren’t enough worthy borrowers? Should the banks just lend to anyone who can complete the paperwork?

Our current predicament is a result of too much lending and too much borrowing. Politicians believe this condition can be relieved by forcing more lending. How does that work? Furthermore, if the purpose of the capital injections was to get money into the economy, what difference does it make whether it gets there through dividends or loans? Well, one reason it makes a difference is that  banks don’t just lend out that capital once; they lend it out multiple times because we only require that they hold a fraction of the capital in reserve. Another reason is the people who own the stock and collect dividends are by definition savers and investors who are unlikely to spend the money. Lord knows we can’t have that. We need people to spend, spend and spend some more.

When did it become economic dogma to punish savers/investors and reward the profligate spenders? How did this myth that the key to economic growth is spending rather than investing become accepted wisdom? An economy with too much debt will not get better by increasing the debt or moving the debt from private to public hands. Economic policy should be aimed at encouraging saving not spending. Future growth is dependent on the pool of available savings for investment and savings cannot be created out of thin air by the Fed; that is mere inflation and does not add to the capital stock.

The depth of economic ignorance on display is absolutley staggering. Check out this paragraph:

Other banks participating in the government program said that they will not use the Treasury’s money to pay dividends. They said dividends will be paid from other capital, primarily from their new profits in each quarter.

Are the people running these banks ignorant of the term “fungible”?  Capital is capital and paying dividends will reduce it whether it comes from profits or the government money.

Our economy will recover once we rebuild our savings and not a minute before. Any monetary policy that encourages consumption over investment (such as the Fed lowering interest rates again) is just kicking the can down the road. That’s what we did after the internet bubble popped and look how well that worked out. Somebody in a policy making position needs to start thinking long term. With elections every two years, that seems unlikely.

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