Here’s the response to Jan’s (Goldman) concern about lost capital constraining lending.

Bank capital grows endogenously- it’s not a constraint on lending apart perhaps from the very near term.

Banks ‘know’ the cost of capital, and the roe’s they need to make to pay for new capital.

For example, if Citi paid 11%, and they can leverage it 15 times, that’s about a .75% ‘add on’ to their cost of funds for funding loans.

With floating fx, the causation is ‘loans create deposits’ and this applies to availability of bank capital as well.

So it’s all about price, not quantity, for both loans and capital.

And banks currently do have a lot of ‘room’ for lending with current capital levels.

Like the recession, this all reminds me of the sign that says ‘free beer tomorrow.’

High oil won’t hurt gdp us as long as the producers are spending their income here.

It will hurt our standard of living and help theirs- real terms of trade and all that.

♥