Job Creation Idea No. 9: Encourage Banks To Lend -- Or Else

Job Creation Idea No. 9: Encourage Banks To Lend -- Or Else

(No. 9 in Huffington Post's America Needs Jobs series.)

This jobless "recovery" we are in right now is no accident.

That's because corporate fat cats are sitting on mounds of money rather than spending it or investing it in ways that would create jobs.

As the Washington Post recently reported, executives at U.S. companies hoarding a record $1.8 trillion in cash are finally dipping into those reserves -- but, amazingly enough, only to buy back their own stock, a move intended to prop up their share prices and pad their bonuses.

Even that, however, is not as bad as what the banks are doing. (Remember the banks? The ones that got us into this mess in the first place?)

The Federal Reserve, ever since December 2008, has been lending banks loads of money at zero or near-zero interest in an attempt to stimulate lending. But far from lending all that cheap money to businesses that could create jobs, the banks have used it to hugely inflate their cash reserves -- from about $20 billion in 2007 to about $1 trillion today. And when the banks do lend, which is rarely, it's at a huge mark-up.

The reason for all this is that the financial incentives are all wrong. Just as companies are afraid to expand for fear the recovery will stall out, the banks aren't motivated to lend because the possible downsides seem greater than the upsides.

So what if the government provided those banks with some big-time motivation -- by taxing those grotesquely swollen excess cash reserves? Wouldn't that shake things up?

That's what Robert Pollin is advocating.

Pollin, an economist at the University of Massachusetts at Amherst, believes we've exhausted monetary policy. "In a severe slump, monetary policy is 'pushing on a string' because you can't go below a zero percent interest rate," he said. But even with monetary policy literally as loose as possible, "the real thing that's meaningful is whether there's credit going out to businesses," Pollin told the Huffington Post. "And there isn't."

In fact, a goodly portion of the jobs crisis can be traced directly an approximately $1.5 trillion shortfall in private borrowing, Pollin said.

Fiscal policy is another possibility, of course. But fiscal action major enough to make a real difference is a political non-starter. "To inject $1.5 trillion back into the economy, you'd have to have something that's twice as big as the [original] stimulus."

Good luck with that. And even then, Pollin said, "there's only so much you can get out of government spending if the private market is not accommodating, which it isn't."

Today, more than ever, Willie Sutton's dictum is right on. The banks are where the money is.

Pollin suggests defining all bank reserves over, say, $200 billion as "excess reserves" -- and taxing them.

"I think a reserve tax is a good tool, and it would be popular, too," he said.

Then comes part two. Banks don't just need to start lending money; they need to lend it at reasonable rates.

Right now, banks are so nervous about the risks involved in lending money that an average, solid business has to pay about 6.5 percent interest for a long-term loan, Pollin has found. Pretty much all of that is profit for the bank, of course, which as you will recall can borrow the money from the Fed for close to nothing.

Pollin proposes lowering the risk for banks by dramatically ramping up the government's existing loan guarantee programs.

"The stick is the tax; the carrot is the huge expansion in loan guarantees," Pollin said. "We're giving them opportunity but we're also holding them accountable."

Even with double the rate of defaults experienced in 2007, the program's increased costs would be minimal compared to the gains, Pollin said. Meanwhile, "it would tell the financial system that if you all are saying risk is too high, we're going to lower risk.

"It's not a way to punish banks," he said. "It's a way to get them to do their job. Their job is not just to sit on idle reserves.


Have you missed any of the previous installments of HuffPost's America Needs Jobs series? Read the introduction, Idea No. 1: A Payroll Tax Holiday, No. 2: Rescue The States, No. 3: The Joys Of Retrofitting, No. 4: Put Young People To Work, No. 5: Gearing Up For Climate Change, No. 6: Sharing The Pain Of Layoffs, No. 7: Drawing A Line With China, and No. 8: Time For A New WPA.

Got an idea you think we may be overlooking? Email


Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.

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