Friday, January 31, 2014

Miscellaneous Perot: Capital Requirements

From Chapter Four of Ross Perot's 1992 book United We Stand, under the heading Create New Jobs:
Free up credit. The deregulation of our banks and savings and loans was poorly thought through and poorly executed. Now we have to repair the damage. Our small businesses are starved for credit. People with good ideas can't get loans. The regulators came to a recent board meeting of a savings and loan to read a message from the administration telling them to start making loans. The board listened with utter bafflement. The day before the same regulators had required them to tighten their capital requirements, which meant they couldn't make any new loans.

There are many things one might take from this. My take is that you can't have tighter capital requirements and increase your lending, both. Not under the circumstances of the 1980s and 1990s. And probably not since the crisis.

If the conflict was already coming to a head in the 1980s, how much worse was it in 2008? And why do we think we can solve the problem today just by tightening capital requirements -- again.

What I've heard of Capital Requirements is that "reserves" are not an effective way to limit borrowing, and something else (a higher capital requirement) is needed.

According to Perot's tale, capital requirements are a particularly effective way to limit lending.

But there is a problem with limiting lending, because (as Perot said in 1992) people are starved for credit. We can't get as much credit as we need. But... but... Does that make sense? I mean, how much debt did we have, anyway?

357% of GDP at peak, according to this 2010 graph from the Wall Street Journal. More than three and a half times GDP. That's how much credit we had in use.

Why would we even want more?

Every dollar of debt is a dollar of credit that somebody borrowed and presumably spent. The borrowed money went off into circulation. From the borrower's point of view, that money remains in circulation until the borrower grabs a dollar from his paycheck and pays it back to the lender, extinguishing the borrowed dollar.

Every dollar of debt is a dollar of credit in use.

Here's what I think. When we say somebody is "starved for credit" it means they can't borrow any more now. It certainly does not mean they don't have any debt. When somebody is starved for credit, they want to use more credit now, but they can't get it. Perhaps because they have too much credit in use already.

What I'm thinking is this: Maybe people can't get new credit to use, because we have so much credit already in use. If we paid down some of our debt -- our debt, private debt -- we would free up some credit and make it available to borrow again. If we paid down some of our debt, we'd reduce our debt-to-income ratios and make ourselves more appealing to lenders. If we paid down some debt, we might become more willing to increase our borrowing again.

If we paid down some debt, we'd have less debt. And who doesn't want that???

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