The idea behind putting (forcing) capital into banks is to help (make) them lend: $1 of new capital can be leveraged-up to make $10 of new loans. But, the reason it's not working is, that $1 of new capital can be "leveraged down" by only $1. In other words, if you put $1 in and existing assets fall in value by $1, you're done, you've spent your dollar and have nothing to show for it. The bank is still there, at least capital hasn't fallen further, but it can't lend, it can't lever-up. Give them another dollar, and the smart bankers will hold on to it for the next round of write-downs.
Until the asset spiral is broken putting money into banks is just micturating into the wind.
JRB
1/23/09
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