“The Fed’s policy makers seem reluctant to say what everyone seems to know: that the risk to economic growth is the predominant concern today,” said Brian Sack, an economist at Macroeconomic Advisers, a St. Louis-based forecasting firm….
“Consumers can get credit, but it is harder now and more costly than it should be,” said Mark Zandi, chief economist at Moody’s Economy.com.
Mr. Zandi and others were particularly critical of the Fed for not cutting the discount rate by at least half a percentage point and extending the loans to 90 days instead of the present 30 days. Banks often fund their operations by borrowing for 90 days at the London interbank rate, which is now just over 5 percent. Allowing banks to borrow at a significantly lower rate from the Fed’s discount window, and for longer terms, economists said, would send a clear signal to financial institutions to encourage more activity.
Update: Greg Ip in today’s Wall Street Journal has this:
Fed officials, however, continue to consider ways of using various tools — including the discount rate — to combat banks’ unwillingness to lend even to each other, which they view as a threat to economic growth. The central bank could take action within days.
A variety of steps, widely discussed in the markets, are likely to be on the table, including another cut in the discount rate, longer-term loans to money-market dealers, easier collateral rules for loans from the Fed, and other steps last taken in 1999 to alleviate funding pressures ahead of the year 2000, when many feared a “Y2K” computer bug would disrupt markets and create economic havoc.
But if this is the case, why not do that yesterday???
One of the key elements to deciphering a story like this is to not only look at what happened, but also to look at who is complaining about it. In this instance the story is linking equities (stocks) with federal reserve rates. In this instance, the Fed is protecting the dollar. Wall Street is notoriously short term in outlook.
With the recent slump in the value of the dollar, there’s a lot of loose cash floating around, so liquidity is not the issue. It’s interest rates. And I think, as a nation, we need to hold our nose and drink the nasty medicine down. If the Fed had employed palliative measures such as the rate cut Wall Street expected, it would have only made the inevitable far worse.
Mousetalker, sorry, but that is not correct. The problem here is the credit squeeze. There were all sorts of options open to the Fed that are noninflationary and would make things better rather than worse.
The fed statement is terribly confusing and out of touch, expectations were badly mismanaged, and now the fed is leaking they will do more. I realize the fed chair is young in terms of experience, but they can and must do much better than this.
The discount rate does not effect consumer credit that much, it effects commercial credit. Indirectly it effects what financial institution are willing to allow for consumers. It seems commercial credit is available and industries not effected are doing fine. There is a actually a construction boom of shopping centers going in to serve the new subdivisions and several urban centers are under revitalization.
Home mortgage loans are on a formula of attempting to beat inflation. While billed as connected to the prime rate, they most likely are artificially. if they fine print does not actually tie the two directly, then the prime rate can be cut but ARM or credit card rate can stay the same.
What the prime rate is the rate at which the Fed loans money to banks. Banks often loan money to commercial accounts tied to that rate (commercial customers have leverage to demand it in the fine print). Consumer customers are a large part of the economy but the because we negotiate by generally signing the terms given to us, then if prime is cut by .5% creditor could cut by .1% or not at all to use the savings from th Fed to make up for the losses in foreclosures.
The Government can do somethings, but is better able to serve business interests than consumers. Not a Dem v. Rep thing, just business needs/desires are simpler and at a volume that are better able to be met, consumers have diverse and complex situations.
I think this article will play very will as it tickles the ear of many. However whatever deal Bush was able to reach with mortgage companies will probably help consumers directly where cutting the Prime Rate would most likely only help the mortgage companies and not be passed on to the consumers.
Right now the Ted spread is higher than it was a month ago. The problem is banks being unwilling to lend to other banks. This is the blood flowing through the financial system’s veins. The fed needs to help get things unclogged.
I don’t know Kendall+, I’m seeing loans still given, if you wanted to purchase $500K worth of equipment, but I think creditors are hesitant to loan for a $500K house.
KAR, the spread between LIBOR and the fed funds rate today is around 80 basis points. It is usually around 11-12; that was its regular level during the Greenspan years.
This is a serious problem. It is rectifiable; but the Fed did not do what was necessary yesterday.
#5,
That’s what I’m seeing as well. Lenders in this market (Atlanta) are desperate to make (commercial) loans. The interest rates aren’t bad (Suntrust just lowered prime to 7.25%), the terms are reasonable, but the requirements for getting good rates have been tightened. The problem is that most businesses seem to be tightening up on their borrowing.
So, Kendall, perhaps. I do agree that expectations were mismanaged, hence the correction at Wall Street. But I’m inclined to agree with the Fed for now. I think it’s very difficult to be as cryptic as Mr. Greenspan was. That sort of thing takes years of practice.
You know Kendall+, if you line up all the economist in the world end to end, they will point in all different direction … I suppose it gets worse when you add in us arm chair types ;-P
And speaking of Mr. Greenspan, he has a [url=http://online.wsj.com/article/SB119741050259621811.html?mod=googlenews_wsj]nice essay[/url] in today’s Wall Street Journal.
🙂
Actually, a ‘quick fix’ ala Alan Greenspan is exactly what the economy does not need. At this point the credit crunch needs to be addressed by fiscal/structural policy rather than monetary policy. Lowering the interest rate and/or discount rate may encourage more lending, however, it does not address the foreclosure and bad debt issues rampant in the economy. In fact, it may even increase the number of defaults. The credit crunch is spiraling out of control.
Also, don’t sell Bernanke short. He’s an Economic Naturalist and quite adept at understanding behavior.
If banks are reluctant to lend to other banks, it is because they are worried about the other banks’ fundamentals. This is exactly the correction that is needed. Kendall is proposing that we give the drunks more bathtub gin.
History suggests that it may not be wise to be eager for the Fed to “do something” about the economy.
Recall that the Fed pumped money into the economy through the ’20s (mostly as a favor to the Bank of England). An inordinate amount of that money wound up in high-tech stocks (radio, mostly), which helped keep prices stable, but caused disaster when the Fed belatedly slammed on the brakes too hard. Then, of course, Hoover’s progressive economic messing around, monstrously expanded by the lunatic New Deal, managed to stretch a short, sharp recession into a decade of unadulterated economic misery.
And of course during the ’90s the Fed pumped money into the economy, an inordinate amount of which wound up in high-tech stocks and then moved into real estate after the eBust. With real estate now semi-busted, there’s no place for the money to go, and unless the Fed is very careful we could get a really serious round of ’70s-style stagflation.
The only really successful Fed action was in the early ’80s, which amounted to wringing the inflation out of the economy by just leaving it alone, i.e. allowing the record high market interest rate to do its grim work unmolested. Remember that the Fed is really just another government bureaucracy — and how often do they do the right thing at the right time?
I’m with Reactionary #11 on this one. Market errors are self-correcting, governmental errors just keep spiraling down and down and …
“If banks are reluctant to lend to other banks, it is because they are worried about the other banks’ fundamentals” —Reactionary
That’s not the only possible reason. Banks may be conserving cash to make sure they have enough to meet their own needs. That’s the natural thing to do when market participants become anxious (and therefore more likely to withdraw deposits and draw on firm lines of credit) and financial assets become far less liquid than they have been).
I agree that we need to be wary of bailing out speculators in a way that encourages future speculation. But we also need to be wary of getting having financial markets seize up and asset values implode.
Classic financial panics (such as the United States had in 1837, 1873, 1890, 1893, and 1907, when it had no central bank) illustrate the danger. Depositors, unsure whether their own banks were strong or weak, ran even on healthy banks. Banks protected themselves by refusing to make new loans, calling existing loans, and suspending withdrawals. This was all perfectly rational from the standpoint of banks’ and depositors’ individual self-interested. But it was collectively irrational because it drove down asset prices, crippled economic activity, and needlessly rendered banks, other businesses, and individuals insolvent. Practically everyone ended up worse off than if the United States had had a central bank that could—as the Federal Reserve now does—make emergency loans to healthy banks that have good assets to offer as collateral. Such lending helps reliquify financial markets (as do the Fed’s open-market purchases of government securities).
Here’s a poignant description of the havoc wreaked by bank failures during the Panic of 1907—the far-reaching ripple effects of a crippled financial system:
Schaake v. Dolley (Kansas Supreme Court, 1911):
“Banks are indispensable agencies through which the industry, trade and commerce of all civilized countries and communities are now carried on. The banker is the universal broker over whose counter the exchanges of supply and demand are, in the final analysis, effected. The capital which he has invested and the returns which he receives upon it are insignificant in importance relative to the advantages which society at large derives from the conduct of the banking business, and the evil consequences of unsound banking are distributed between the banker and the general public in like proportion. Banking . . . has ceased to be, if it ever was, a matter of private concern only, like the business of the merchant, and for all purposes of legislative regulation and control it may be said to be ‘affected with a public interest.’ The public patronage which the banker invites and receives is of such a character that he becomes in a just sense a trustee of the fiscal affairs of the people and of the state. If a merchant can not meet his bills promptly the general public is not disturbed. He is not ruined at once, and if he should fail the effects are limited to comparatively a few persons. If a bank is unable to meet a check drawn upon it the refusal to pay is an act of insolvency. Its doors are closed, its business is arrested, its affairs go into liquidation and the mischief takes a wide range. Those who have been accommodated with loans must pay, whatever their readiness or ability to do so. Further advances cannot be obtained. Other banks must call in their loans and refuse to extend credit in order to fortify themselves against the uneasiness and even terror of their own depositors. Confidence is destroyed. Enterprises are stopped. Business is brought to a standstill. Securities are enforced. Property is sacrificed and disaster spreads from locality to locality.”
Stalker #9 — Many thanks for the link, but it goes to the WSJ subscription site. The whole Greenspan piece is available free at http://opinionjournal.com/editorial/feature.html?id=110010981
or for our friends down under at
http://www.moneyweb.co.za/mw/view/mw/en/page94?oid=176957&sn=Detail
“Market errors are self-correcting” —Craig Goodrich
I agree that governmental policy errors can be hard to eradicate. But market meltdowns can take long, grievous years to correct. Financial-market liquidity disappears just when you need it (the so-called “Minsky effect”). Then, as I noted in #12, the individually rational behavior of millions of people can become collectively irrational and self-defeating. In game-theory terms, you then have a collective-action problem, a common-pool problem, and a prisoner’s dilemma. In the real world, you have needless loss and pain.
The challenge is to take the edge off the financial crisis without bailing out firms that deserve to fail. Central banks can do that by emergency lending to healthy banks (in the U.S., through the Fed’s “discount window”) and by buying securities on the open market, which has the effect of increasing bank reserves and the money supply. These policies respond to the systemic problem without having the government pick winners and losers; market mechanisms will still impel a sorting out.
I hate government bailouts and government subsidies to the financial system. I question much of the conventional wisdom adduced to support such actions. But preventing a systemic meltdown is another matter.
Irenaus,
What you are describing is a system designed to bail out inherently fraudulent fractional reserve banks who’ve lost the bets they’ve made with other people’s money. One could argue for the same system to keep the Enrons and dot-coms afloat to avoid unemployment and economic contraction.
The “credit crisis” is nothing less than the inevitable liquidation of malinvestments occasioned by the Fed’s prior policies of artificially cheap credit. The more the Fed intervenes to mitigate or postpone the liquidation, the more harsh the correction will be when economic reality asserts itself, as it always does.
Irenaeus — You mention the role of central banks in (allegedly) alleviating systemic financial problems. But in the panics you list, you have to bear in mind the role that self-serving regulation (generally by the States, during that period) played in causing (and exacerbating) these panics — all of which were mild in comparison to the catastrophic Great Depression.
In any society where the major economic activity consists of agriculture (with variable weather) and rapidly developing technology (steam, railroads, electricity, telegraph, telephone, over the period you mention), there will be regional and market-sector ups and downs. Businesses, banks, and farmers will go bust. This is inevitable. But the effect of government regulation — and much worse, central banking — is to ensure that economic correction in one industry is delayed until it’s too late, and that its consequences spread as far as possible.
There is a [url=http://www.federalreserve.gov/BOARDDOCS/SPEECHES/19960919.htm]speech[/url] given in 1996 by Mr. Greenspan reflecting on the “wildcat banking” period in America — roughly 1840 to the Civil War. As I recall, his conclusion was that the system — largely unregulated — adapted quite well and with amazing rapidity to various local market conditions. And this was in a period where each bank could issue its own paper money!
And in the column I linked in #15, Uncle Alan’s conclusion is that the volume of negotiable financial instruments in circulation worldwide has gradually weakened the power of “central bank” institutions to control money supplies and exchange rates. I for one regard that as a very good thing.
Irenaeus #16 — … emergency lending to healthy banks …
Mmmpf. In the whole sorry history of government intervention in the banking system, somehow the banks judged “healthy” and hence deserving of a bailout have always been the ones with the most political clout, not the ones with the best balance sheets. In the late 1890s, the House of Morgan (which was running Treasury) used TR’s “big stick” to beat up the Rockefellers, who were using their Standard Oil money to compete on Morgan’s financial turf. Then under Roosevelt II, the Rockefellers ran Treasury and did their best to make life miserable for Morgan.
Jefferson asked exactly the right question: “Have we found Angels to govern us?”
“What you are describing is a system designed to bail out inherently fraudulent fractional reserve banks who’ve lost the bets they’ve made with other people’s money” —Reactionary
Reactionary [#17]: If you regard fractional-reserve banking as “inherently fraudulent,” then you essentially condemn the existence of banking itself.
I agree that current problems result in significant part from mistaken government policies. The budget-busting tax cuts made earlier in this decade helped fuel a speculative run-up in asset prices as well as an orgy of consumption (not to speak of gaping trade deficits).
__ __ __ __
Craig [#18]: If you have more specific information on Greenspan’s speech, I’d be interested. Here’s a link to the 1996 speeches on the Fed’s website: http://www.federalreserve.gov/newsevents/speech/1996speech.htm
I agree that market forces worked better during the Free Banking Era (1837-1863) than the traditional story gives them credit for. But Andrew Jackson’s destruction of the Bank of the United States nonetheless imposed a deadweight loss on the economy by exacerbating booms and busts.
I would be astonished if Greenspan were using that era to oppose central banking. He believes in having central banks to moderate the money supply through open-market operations and to serve as lenders of last resort during financial crises.
Irenaeus — click on the word “speech” in the first line of the third paragraph of comment #18.
Greenspan — contrary to most of us — had a wonderful productive youth as a libertarian gold bug, then misspent his maturity as a monetarist, though the virtues inculcated during his strict upbringing kept him from any major mistakes. He is approaching his second childhood, thank Heavens, with increasing appreciation of the value — and inevitability — of free financial markets, and increasing skepticism about the actual power of central banks.
Craig [#19]: The best-known bank bailouts (e.g., Continental Illinois in 1984) occurred through the FDIC and its now-deceased thrift-industry counterpart. The Fed played its own sorry role by pressuring the FDIC to act.
But the Fed itself cannot make gifts of money to banks, nor can it lend banks money without receiving adequate collateral. The Fed has not, in fact, ever lost money on a discount-window loan.
A 1991 law essentially precludes FDIC bailouts of troubled banks. It also discourages the Fed from lending to thinly capitalized banks.
If you regard fractional-reserve banking as “inherently fraudulent,†then you essentially condemn the existence of banking itself.
Why? The only school of economics that correctly accounted for the stagflation of the ’70s, the Austrians, view fractional-reserve banking exactly that way, and it is, after all, a relatively new development (legally, anyway) — although sovereigns have been trying to get banks to create money for them at least since Romulus and Remus were wolf pups.
Craig [#21]: Greenspan’s 1996 in no way argues against central banking. Instead, it opposes heavy-handed bank regulation.
Quite right; as we say, he’s maturing; his WSJ piece says (as noted) that central banks can no longer quite keep up. He’ll come around eventually…
Craig [#23]: Fractional-reserves are as old as banking and have nothing to do with fiat money.
“Fractional reserves” mean simply that a bank does not keep enough cash on hand to pay all depositors at once. It keeps enough cash on hand to meet its anticipated needs for cash. But it invests the rest in loans, securities, and other financial assets.
In Frank Capra’s 1946 film, “It’s A Wonderful Life,” Jimmy Stewart responds to a bank run with this classic explanation of banking:
“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house . . . right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?”
If banks kept all their money in the form of vault cash, they would not be “banks” but collective safe-deposit boxes. The bank could not use depositors’ money to make loans or other investments.
You would have to pay the bank fees to keep your money, since the bank would otherwise have no income to pay its operating expenses.
Jimmy Stewart said,
“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house . . . right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?â€
Yes, indeed, Jimmy is right, both factually and morally. And Jimmy is not doing [url=http://en.wikipedia.org/wiki/Fractional_reserve_banking]”fractional reserve” banking[/url] — because for every nickel he’s loaned to Mrs. Macklin for her house, he had a nickel deposited in Fred’s savings. He hasn’t created any money, he’s simply put it in circulation.
“Jimmy is not doing ‘fractional reserve’ banking—because for every nickel he’s loaned to Mrs. Macklin for her house, he had a nickel deposited in Fred’s savings” —Craig Goodrich
Craig [#27]: You seem to be confusing fractional-reserve banking with the multiplier effect of money. All banks use fractional reserves; the only way they could avoid doing so would be to keep all their deposits as vault cash or the like.
Neither fractional reserve banking nor the multiplier effect of money are concocted by governments. They arise naturally in a free market with adequate practical and legal infrastructure. Fractional reserve banking arises because it is efficient: e.g., it puts savings to productive use. Governments enter the picture by imposing legal reserve requirements, which require banks to keep more of their assets in cash than they otherwise might. The higher the legal reserve requirement, the lower the multiplier effect.
Irenaeus,
[blockquote]Fractional reserve banking arises because it is efficient: e.g., it puts savings to productive use. [/blockquote]
FRB arises not because it is “efficient,” but because it is profitable. However, cartelization is essential to its current level of profitability. Otherwise the market would, as it historically has, set reserves at far higher levels than bankers currently enjoy as the “spread” between money deposited and money loaned out. The other price extracted from society for this practice is debasement of the dollar from monetary inflation.
The “multiplier effect” is a Keynesian pipe dream. You cannot get richer by printing money.
PS: The multiplier effect does not occur within a bank (as in your example of Fred and Mrs. Macklin). It occurs when, for example, money borrowed from one bank gets deposited at another bank.
To clarify, the alleged benefits of the multiplier effect are a Keynesian pipe dream. It is nothing more than an involuntary transfer of wealth from downstream recipients of dollars to upstream recipients of dollars, which is why it’s always folks like Jim Cramer screaming for increased liquidity.
“To clarify, the alleged benefits of the multiplier effect are a Keynesian pipe dream” —Reactionary
Monetarists like Milton Friedman accept both fractional-reserve banking and the normality of a multiplier effect.
Friedman’s Monetary History of the United States (1963) criticized Federal Reserve for contracting—rather than expanding—the money supply during the early 1930s.
If this eminently anti-Keynesian economist had agreed with you, he would have wanted a further contraction of the money supply—a Luddite contraction. He most emphatically did not.
Reactionary [#29]: Where in the world do you get your accusation of CARTELIZATION in the U.S. banking system?
I’m no economist, but it seems to me that regardless of the “interest rate”, the big picture is that this economy is in deep, deep trouble. That doesn’t mean it will do a ’29 crash, but I wonder if it could.
Here’s what I think is happening, and I don’t hear anyone on the left or the right talking about it. If I’m way off base here, and I hope I am, I hope someone can show me how.
The middle class is being squeezed to death. Some of this is due to keeping up with the Jones’s, but alot of it is due to the staggering increase in the cost of housing, transportation, education and to a lesser degree healthcare. While some items are cheaper than ever, such as technology and home appliances, other parts of our lives cost much more as a percentage of income than they did in the 70’s. The tax code has become so “progressive” that the poor pay almost no Federal tax, so when the economy slows, the tax receipts tank alot worse than they would if we had a fairer distrubution of tax. By the time the middle class pays for all this, including insurance, etc, there is nothing left.
Mom AND dad are now working, and barely keeping up. Because of the failure of the public school system, those who can afford it and don’t live in communities where the public schools are safe/effective, must pay for private education. Since both parents work, they have to pay for childcare. Because of urban sprawl (also partly a result of failed communities), their commute is longer than ever so the transportation costs have gone up. Partly because the home mortgage interest is the main deduction left for most people, it is attractive to finance all this overspending with home equity credit. Because of the freqent refi’s and overly loose lending/appraisal standards, the real estate market is falsly inflated-which has led to the housing bust. Add to this the fact that the average size house in the ’50’s was around 2000 sq feet and they had larger families too, I’m told, and you see why the housing costs have gone through the roof. Nowdays, it’s hard to find a modest sized house in a safe neighborhood, so people are forced to “buy up” in the suburbs. Again, the contribution of failed neighborhoods and failed schools is driving up real estate costs.
The right continues to talk about growing out of our malaise and cutting taxes (I’m for that, BTW), which leads to higher Fed deficits and a falling dollar/stagflation. The left wants to raise taxes and spend more on social programs, which tanks economic growth and further depressed their receipts. Neither acknowledges that with the availability of cheap credit, the American lifestyle is simply out of control and people are maxed out on two incomes and destroying their health to keep up with it all.
I’d like to see a pure consumption tax “the fair tax” and a repeal of the real estate deduction. It would do alot to cool the housing market and make it affordable for the poor, the young, etc.
Lowering the interest rates just tanks the dollar’s value and robs Americans of money, while pretending to support the Dow Jones. We need to accept that there must be a few years of paying off debt (personal debt, that is), and minimal growth during that time. Interest rates need to rise, as they did in the 80’s, to attract foreign investment, discourage consumer borrowing, and encourage saving. What we are doing now is just avoiding the eventual worse correction.
Trouble is, the polititions will not accept an economic slowdown in a debt-driven economy, because their tax receipts drop and then they can’t buy votes with their social programs.
Cap’n Jack: Huge, needless federal budget deficits contributed to the boom and now constrain a fiscal response to the bust. The overhang of excess also holds the risk of inflation and a further fall in the value of the dollar.
What a contrast to the fiscal surpluses of President Clinton’s second term.
Irenaeus,
The Federal Reserve system is a cartel. Its purpose is to enable the government to cash its checks even though it’s billions of dollars overdrawn, and to enable bankers to pyramid loans on top of insufficient assets. This is called check kiting and fraud when you and I do it.
Reactionary [#37]: The more you write, the more clear it becomes how little you know and how much you misunderstand.
Where do you get this stuff?
Irenaeus,
You need to attack the premises or show how they lead to a different conclusion. Merely saying, “Where do you get this stuff?” is not worth your time to type.
Irenaeus,
To further respond to your query, the Federal Reserve system is a cartel because it enlists a central authority to set reserves rather than allowing competition between banks to establish reserves. When the market set reserves, there were runs on banks that stole their depositors’ money. The Fed, with its endless injections of “liquidity” or “capital” enables banks to inflate uniformly, unchecked by the threat of bank runs. This is good for the banks and net tax consumers, upstream recipients of the new dollars, and bad for the rest of us.
And finally, Irenaeus, a question for you: if you don’t trust central planning to set the price and supply of, say, automobiles, why do you trust central planning to set the price and supply of money?
Reactionary [#40]: The Fed can INFLUENCE short-term interest rates and in so doing affect the money supply. But market forces are too strong for the Fed to set interest rates, much less fix the money supply, in a way fundamentally at odds with market forces.
— The Fed can do little about long-term interest rates: market forces overwhelm the modest tools of monetary policy. The Fed affects long-term rates mainly insofar as market participants judge Fed policy to be a source of confidence or anxiety.
— Even in dealing with short-term interest rates, the Fed acts THROUGH market forces. If it wants to increase the money supply, it buys securities in the open market and pays for them by crediting the buyers’ banks’ accounts at the Fed. That changes the monetary base and, after a lag of 12-18 months, can affect the real economy.
_ _ _ _ _ _ _ _ _ _ _
Your concern about the potential for government support to help looted banks to remain open [#39] relates to DEPOSIT INSURANCE, not the Fed’s role as lender of last resort.
The Fed cannot and would not lend to a bank whose liabilities exceeded its assets. But even if the Fed wanted to, it could not keep the bank open indefinitely. It can make loans only if they are fully secured by a first lien on proper collateral. (A looted bank would eventually run out of unencumbered assets and thus have to close because it could not meet is obligations as they become due.) In any event, banks whose assets exceed their liabilities cannot remain open. The law requires regulators to close any bank that has more than $98 in liabilities for each $100 of assets.