- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Especially now, when in so many countries central banks are taking higher grade mortgages as the instrument for repo lending, and when lending to fellow banks is seen to create a much riskier credit than in normal times, a bank with liquidity looking to rebuild its book could well be fishing for those potential customers out there who are still good credit risks for whom they can create a high quality mortgage to hold for the income, and as a repo asset in case their current liquid position moves against them.
The key problem in a bank solvency crisis, after all, is that the ordinary flow of liquidity around the banking system, which is ordinarily matched up against needs for bank liquidity by inter-bank lending, is getting bottled up at the matching up against needs for bank liquidity step in the process, because of the true uncertainty regarding the solvency of the bank that is taking out the short term loan.
That is going to be hitting project lending hard, as the credit assets created lack a liquid market with a price maker. Reserve banks in a number of countries have stepped in to act as price maker in markets for short term lending collatoralised by mortgages ... the Fed has been doing this for a year now.
A Works Public Administration for big, nationally (or for the EU regionally) strategic, project construction would get around the project lending credit crunch, but of course would do so by sidestepping project banking rather than by removing the bind. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
