International Law

Evil Roy Slade and Banks

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One of the best western movies is Evil Roy Slade which also had a philosophical view about accounting that is relevant to the US bailout of their banking system.

Evil Roy Slade is leader of bank robbing gang - and Evil Roy needs to break up the gang. He goes to the gang's accountant to find out how to split their money.

"But the gang's unfortunate accountant, Randolph (Billy Sands) has problems with Evil Roy quitting.

[There is no money, as Randolph shows Roy in the accounting ledger. But Roy has other ideas.]

Roy: "See that blank space right there? You make a 5, and some zeros, and you make that $50,000. ...

So where's the money you got marked down in that book, Randolph?

You owe me $50,000 and you ain't got it?!"

Evil Roy then has has to rob another bank in order to get his $50,000 that his accountant "found" on Evil Roy's balance sheet. 

Felix Salmon makes a similar point about the bailout plan which simply finds new balance sheet assets for the US banks. 

"America's banks -- and the world's, for that matter -- have had de facto unlimited access to very cheap Fed liquidity for many months now. That hasn't induced them to lend.

Will this latest recapitalization do the trick?

I'm far from convinced. And what's more, the demand for loans is drying up fast: do you really feel like buying a bigger house right now, or taking out a car loan? Well, businesses are in the same boat. In a recession, their ROI falls, so they borrow less.

With less demand for money, and no real desire on the part of the banks to lend it out, I think it'll take more than hand-waving statements from the Treasury secretary to get the credit markets moving again. I do hope that Paulson is looking one step ahead here, and coming up with ways to compel the banks to lend -- even if they don't particularly want to.

So, I guess that means Evil Roy will have to ride again - creating involuntary loans from banks!

Full post as published by Misleading Advertising Law on October 15, 2008 (boomark / email).