Geithner hopes to fool people.
(Photo Credit: p3books.com)
Tim Geithner announced that a vast majority of banks are well capitalized in the U.S., but Paul Krugman, among others, was quick to rebuttal this statement and rightfully so. This statement is incredibly misleading. While technically Geithner is correct, it is a classical example of lying with statistics.
There are over 1,722 large commercial banks in the U.S and many of them have been very risk averse and therefore did not get caught up in the sub prime mortgage debacle and risky lending practices. This means a great deal of these banks are fine and have very adequate levels of capital to safely handle their operations, but the vast majority of these healthy banks are very small players in the grand scheme of things. Krugman points out that the top 10 banks have 58% of total assets. These are the JP Morgan’s, Citi’s, Bank of America’s, etc.
Most of these top banks are not adequately capitalized and due to their sheer size are very important to the financial system. Saying that the majority of banks are well capitalized does not at all mean the financial system is in good health. The majority of banks don’t matter because they are so small. When we look at the major players, banks are not in healthy positions. Many are insolvent and are the bottle neck of the economy right now. They are holding extreme amounts of reserves to protect against bank runs and more importantly risk. This is causing lending to lag and the economy to lag as well.
Basically, who cares if the vast majority of banks are well capitalized and solvent? It doesn’t matter because in the system we live in a minority of banks hold the financial system up, and this minority made a lot of stupid decisions and now the minority of banks are insolvent and under capitalized. Therefore the U.S. financial system is still in shambles. Lending will continue to slow and the economy will continue to slow. Geithner is trying to get confidence up and create much needed optimism for the sake of the markets, but I don’t know if people are this (ughh) dumb. It was a good try Mr. Geithner.
