The decidedly plaintive note that our financial journalists have been sounding – that consumer confidence will return and the economy will rebound – is dishonest to the core. Lack of jobs and decent wages keeps erstwhile consumers from buying despite all the fictitious analysis the business press keeps manufacturing.

There is a lack of confidence that does indeed keep our economy from rebounding, and that’s the lack of lender confidence. Waiting for higher returns, the loan-making community is showing its usual short-sided behavior. By holding onto its funds, the financial sphere commits suicide, bolstered by adherents who only think about the bottom line.

Without new loans, the economic activity our economy is based on is not getting turned around. However, major lenders are refinancing the old, bad loans for higher returns. Taking the 2008 stimulus funds that the government used to ‘bail them out’ under the Bush administration, the lending institutions are reaching for another disaster.

Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of Aug. 12, up 75 percent from May 6.

The increase suggests money is being used for riskier home- loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington…
Lending to purchase loans rated below investment grade and mortgage bonds is part of this year’s recovery in credit markets.

(snip)

“If you lever up an asset at these already elevated prices, and the underlying fundamentals, like termites, start to chew through the performance of the security, at some point it becomes unsustainable,” said Julian Mann, who helps oversee $5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles.

There is an increasing need for regulation of the financial institutions that make these ever-growing errors in judgment. While maximization of profits is the ultimate goal, the failure to build up assets and real worth is defeating that end. The real economy is the one that financial speculators milked dry. The moneylenders are incapable of rebuilding a healthy production sector, a basic function they do not have a real comprehension for. The real economy is the one that produces this country’s worth and pays real wages that are sunk back into the national wealth.

While the nation struggles through the throes of recession/depression, the marketeers are investing in its offal. The financial community is returning to toxic loans that they originated and cannot see are a fiction. Relying on that segment of the economy for our turnaround is an exercise in ignorance. As Dr. Krugman has insisted, the government needs to step in to avoid continuing economic disaster.

The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

The shoe that has not dropped yet is the re-valuation of toxic assets on these lenders’ books. While the banks have been propped up, their books are still being written in disappearing ink.

A bold hand is needed to take hold of the financial industry and pare it back to operative, functioning reality. That bold hand should start with increasing investment in infrastructure and innovation in industry, through government supports that will pay off in jobs, wages, and growth.