Bank Bailouts and the Loans Myth

Since my friend Joe Nocera first wrote about it last weekend in the NY Times, I have seen a spate of other articles all saying that bank executives are bad people for taking money from the U.S. Treasury and not ramping up their lending.

Trouble is, that’s wrong-headed. Recall, the intent of the bank capital infusion was to backstop banks so that insolvency fears would be reduced, or even eliminated. While solvent banks will eventually make loans, it is meddlesome and illogical to say that having made injections we should now be tapping our collective feet at bank unwillingness to extend more credit than they are.

Banks are looking at a changed world, one with deleveraging everything, consolidation happening apace, and defaults almost certain to rise rapidly over the next 24 months. Imagine that despite all of this banks began “business as usual” lending. What would happen? Almost certainly the banks would see higher levels of non-performing loans and defaults on these new efforts, perhaps even to the point that they would require more capital to reduce solvency fears. And what would we say then? We’d say, “Idiots, why did you race out and loan the money that we gave you into this weakening economy?”

fitch-defaults_thumb.png

Now, was this bailout sold properly, with people told that banks shouldn’t and wouldn’t begin lending straight away? No, it wasn’t. Nevertheless, reasonable people should have been able to figure out on their own that giving banks capital just so they lend it out again into a deleveraging economy is absurd. We were trying to save the banks, not screw them up worse.


Originally published at Infectious Greed and reproduced here with the author’s permission.

2 Responses to "Bank Bailouts and the Loans Myth"

  1. Anonymous   November 7, 2008 at 8:44 am

    Perhaps a truer closing line would read “we were trying to save ourselves, not screw ourselves up worse”. The banks have caused great damage, why absorb the damage they’ve done themselves as well, for nothing?”Was this bailout sold properly?” I trust the author is glancingly aware of how corrupt the current arrangement seems to be between american banking and government.To quote Catherine Austin Fitts:”Authorizing a group of private bankers to issue our currency, hoard our financial data, and run the federal government accounts — including the Exchange Stabilization Fund, the mother of all slush funds — created a financial system engineered to advantage the large banks and financial centers at the expense of diversified production and markets.”This is from a highly recommended analysis of the Housing and Economic Recovery Act of 2008:http://solari.com/archive/housing_bill/

  2. Guest   November 7, 2008 at 10:54 am

    Fuck the banks. We don’t need them – they need us. All we need are food, air, water, and a place to sleep. The rest is wants, not needs.