The problem is lack of solvency, not liquidity

A short note from Henry Blodget that claims the Monday infusion of cash has done nothing to move banks to loan out money:

So much for that story. A few days ago, when Hank Paulson called the heads of the nine families to Washington and shoved cash down their throats, he announced that the banks would use this new taxpayer cash to lend.  They won’t, of course. They’ll hoard it like a starving family who has just been given a grocery cart full of food.

And after a few days of silence, even the banks are finally admitting that. So it’s back to the drawing board for Paulson & Co.

This is edging into satire. After describing what the next step will probably be, Blodget notes gloomily:

Only then will the banks begin to lend again. And at that point, the only challenge will be finding people and companies to lend to, in an economy headed straight into the tank.

But as Mike Shedlock pointed out on Wednesday, reluctance to lend the money you have, no matter how big the pile, is nothing more than sensible behavior at this point:

The US is in a recession, consumers are cutting back discretionary spending, there is rampant overcapacity in every sector but energy, and there is no reason to go on a lending spree. Furthermore, there is no reason for any qualified buyer to want to borrow. Why would any responsible party want to expand in this environment? The only people who want to borrow significant sums of money now are the very people banks should not want to lend to. Thus the best thing banks can do with that money is sit on it.

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