Rowyn (rowyn) wrote,
Rowyn
rowyn

The Wall Street Journal Says It So I Don't Have To

Banks Told: Lend More, Save More.

The link above is to an article, not an opinion piece, which is right because this is simply a fact. The message to banks has been "you need to lend more so we can get out of the recession, and oh also you need to save more so that you'll survive the recession." This message, of course, comes at a time when banks have less money than ever to lend or save, and fewer borrowers are creditworthy.

It's a variation on the same mixed message that gets sent to consumers: "We're in a recession because people aren't spending as much, but people need to stop spending and save more because we're in a recession."

There is truth in both halves of both statements. There are good reasons for wanting banks to, somehow, do more of both, just like there are good reasons for wanting consumers to do more of both. When regulators say "we're trying to strike the right balance", they're right: a balance needs to be struck.

One of my friends linked to an AP article that hyped up another fact, which is also mentioned in the WSJ article: TARP money is not being set aside to fund new lending, and in fact that the beneficiaries were not tracking allocation of TARP funds separately from the rest of their capital. The AP implied that this meant the TARP money must have been misspent, which is nonsense.

The primary purpose of TARP was, and is, to stop banks from filing for bankruptcy. So far, it has accomplished this purpose. It's a pretty worthy goal, mind you, and TARP was conceived at a time where major financial institutions were collapsing at a rate of one every few days. That doesn't mean that TARP was necessary or the right move, but it shouldn't be dismissed out of hand as foolish. When Bernanke says that TARP is there to encourage lending, he is absolutely correct. It is encouraging lending. See, a bank that's lending 75% of what it lent a year ago is lending more than the 0% that a failed bank would lend.

My own opinion on the situation is that the current crisis is partly the result of inadequate capital reserves and lax lending standards. Asking banks to drain their capital reserves and resume lending at lax standards is just putting off the day of reckoning. Yes, banks cannot over-correct. We can't save our way out of a recession any more that we can spend our way out of it. Banks must continue to make loans to creditworthy borrowers.

But I strongly feel that Congressional and popular pressure on banks to dedicate TARP funds to lending is deeply misguided. Regulators know what they're doing when they tell banks to build their capital cushions, and pressuring banks to write down bad loans is much better than Japan's 10-year "pretend everything is OK" policy of the 90s.
Tags: economics
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