Chris Matthews vs. Tony Fratto

by Greg Pollowitz

Here’s a testy exchange between Chris Matthews and former Bush official Tony Fratto on Friday’s Obama press conference on the economy:

Though Jansing and Fratto tried to respond to Matthews, he continued. “You can’t get re-elected with tactics,” Matthews said of Obama. “He needs a strategy, which is, ‘We’re different from Republicans. They’re basically free-marketers, who sit around and wait around for businsess to deliver this country from hell, and business has let us down.’ He’s gotta say it.”

Fratto interjected, saying that the American public want the private sector to lead the economic recovery. “The private sector is sitting on 2 trillion dollars right now,” Mathtews said, quickly interrupting. “It doesn’t want to spend because it doesn’t want this guy to look good. It doesn’t want him re-elected.”

“I don’t think that’s the reason,” Fratto said. “The private sector will spend money if they think they’re going to get a return on that money.”

The only problem is, Matthews’s hoarding narrative is false. Basically, companies have the same amount of “hoarded” cash as they had before the crisis. From Saturday’s WSJ:

$496.5 Billion: How much less cash U.S. corporations had at year-end 2011 than previously believed.

The Federal Reserve on Thursday came out with its quarterly “flow of funds” report, which for two years now has reflected the steady increase in the amount of cash on corporate balance sheets. Sure enough, the report showed that corporate cash ticked up yet again in the first quarter of the year by around $12.6 billion, to $1.74 trillion.

But here’s the funny thing about that figure: Back in March, the Fed said nonfinancial companies ended the year with a record $2.23 trillion. The new release revised that figure down to $1.72 trillion. Even for the Fed, a half-trillion-dollar revision is a big deal.

$1.7 trillion is still a lot of money, close to an all-time high. But more significant than the actual number is the implication for what had been one of the most enduring narratives of the recovery: the massive pile of cash that was sitting on the sidelines.

The old story went something like this: The 2008 financial crisis wiped out the cash reserves even of seemingly healthy companies. The ones that survived scrambled to rebuild their reserves as a buffer against renewed turmoil, then kept saving even after markets stabilized and profits rebounded. This has been paradoxically both a cause and an effect of the slow recovery, as companies’ reluctance to spend has reduced economic activity, giving spooked executives yet more reason to remain cautious. Depending on your political leanings, the problem is evidence either of the dangers of corporate greed or of the pernicious effects of over-regulation.

The revised data — at least if it is to be believed — changes all of that. Under the new narrative, companies still rebuilt their reserves in the wake of the financial crisis, boosting their cash holdings from $1.4 trillion at the end of 2008 to $1.7 trillion in mid-2010. Since then, however, the cash hoard has barely budged, as companies neither draw down their reserves nor continue adding to them.

The long-term trend makes the cash hoard look even less remarkable. As a share of assets, cash has been trending upward since the 1980s, rising from about 3% in 1982 to just shy of 6% at the end of 2005. Cash reserves tanked during the financial crisis, then soared in 2009, quickly returning to the earlier trend line. Since then, they’ve more or less held to their prior trend.

The rest here.