Use $140 billion stimulus for bank capital, not tax rebates
Posted by: in Stocks Money NewsFiled under: Citigroup Inc. (C), Economic data, Politics
The stock market is not exactly cheering about the announcement of a $140 billion stimulus plan which would give people $800 tax rebate checks. In a $14 trillion economy, that 1% of GDP rebate won’t do much.
I think the money would go much further if it was used to recapitalize the banks that are writing down their collateralized debt obligations (CDOs). To maintain their capital ratios — for instance, Citigroup (NYSE: C)’s Tier 1 capital ratio target of 7.5% — banks that write down their assets need to either raise more capital or shed more assets or both.
But the great thing about recapitalizing banks is that they could lend out that capital to people who would put down some of their own capital and borrow the rest to make a purchase. $1 of capital invested in a bank could add almost $17 to GDP. Here’s a rough example: if a bank trying to maintain a 7.5% capital ratio gets $1 of capital, then it can theoretically make roughly $13.33 worth of loans. If a person wants to buy a house with a 20% down payment, then that $13.33 can be used to buy $16.66 worth of real estate.
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