A Fundamental Restructuring at Hand? American capitalism could be in for another fundamental restructuring as a result of the current financial crisis.

The core question is whether private financial institutions will resume lending for "normal" business, consumer, real estate, and home mortgage operations.

After the Sept. 15 meltdown of Lehmann Brothers, credit was frozen as major financial institutions were unwilling to take risks and sought to hoard cash to pay off demands from their own creditors.

As a result, Congress passed legislation authorizing the federal government to spend $700 billion in efforts to "unfreeze" the credit markets. Initially, the idea was for the federal government to purchase "bad" mortgage-based assets (mortgages, derivatives, credit default swaps, etc.), but the Treasury Department and Fed moved toward purchasing equity in troubled financial institutions as a way to provide them more cash to work with.

So far, they've put almost $350 billion into the effort.

But it hasn't worked. According to a Dec. 16 McClatchey article:

. . . despite the attractive rates, banks aren't lending to most consumers and businesses. Weak financial institutions continue to hoard cash and build their balance sheets, with little appetite for risk in new loans. That's worsening the economic downturn, especially since it hurts consumers, who drive almost two-thirds of U.S. economic activity.

As a result, the Federal Reserve Board is taking a much more aggressive role as a national financial manager.

The Fed already has become the buyer of last resort for financial products that aren't moving in today's frozen credit markets. It's bypassed banks and is purchasing short-term promissory notes issued by big U.S. corporations, called commercial paper. It's also announced plans to buy pooled car loans, student loans and credit card debt, collectively called asset-backed securities. In another creative step to boost the housing market, the central bank also has been purchasing pooled mortgages — called mortgage-backed securities — and debt issued by Fannie Mae and Freddie Mac, the mortgage finance giants that the government seized in September. The senior Fed official said that efforts to purchase mortgages backed by Fannie Mae and Freddie Mac were being ramped up.

It appears that the federal government is also going to get into the business of direct lending.

The Fed's statement also said that it will extend credit to households and small
businesses early next year. Other experts think that the Fed will increase its purchases of troubled assets to unclog credit markets.

But what if the banks, insurance companies, and other financial private institutions don't want to get back into these kinds of businesses. What if the financial institutions don't see enough the rising profits in consumer loans, housing loans, commercial paper, and other kinds of "mundane" banking business that would be needed to justify increasing stock prices? "Shareholder" value was the mantra of the early 2000's. What if the banks don't see that much shareholder value in the financial transactions needed to keep the economy functioning?

Wouldn't they focus their attention on other more profitable kinds of transactions instead?

Not being an economist or banking or financial expert, I don't really know the answer to these kinds of questions. But I can't help but wonder if the economy isn't going to be restructured to give the Federal Reserve Board a more central role in promoting the financial transactions needed to bring business productivity and consumer purchases into sync.