Why the Banks Aren’t Lending.

There’s a glut of cash sitting in the hands of the banks, and darn it, they just won’t lend it! The banks are the reason this country hasn’t recovered from the worst recession since the Great Depression! They aren’t lending like they ought to be; like they were in 2007 and 2008! Of course, that’s when they were lending to everyone and his dog, regardless of his ability to pay. Which, as I recall, is what triggered this recession.

Yes, that’s right, it was the banks’ tendency to make risky loans, package one hundred or so of those loans together and sell them that caused this economic problem. This risky lending–which in itself is not a bad thing, as long as one has a monumental amount of more highly rated mortgages to offset the risk–did not turn out very well for many of these banks. Or, rather, for most of the banks, even the ones that did not engage heavily in subprime loaning and toxic asset sales. Because as the president of BB&T explained on John Stossel’s Atlas Shrugged special, even the stable banks were forced to take TARP funds.

The fallout and negative press that the banks have received as a result of the failure of the toxic asset system have made them wary. Wary of too much lending, lest they make a mistake and be hammered by the government or the public. Wary of lending to the wrong people, which is good; it means that they have learned their lesson. I don’t agree with any of the programs or plans that the government has enacted to punish the banks for irresponsible lending, but many banks made a mistake and the punishment that the markets (would) have naturally doled out is just. And that the banks are careful to whom and how much they lend is a sign that they will not be making the same sort of mistake again.

I’m not exactly sure why the Obama administration feels the need to punish the banks and impose all sorts of regulations that make it harder for the banks to make a profit. I have a feeling it has to do with the outlandish notion they hold that under-regulation is what caused the banking “crisis”. If any sort of regulation was the cause of this mess, it would be the regulation imposed on the banks that compelled them to make loans available to anyone, regardless of their ability to pay. This is epitomized in the loaning practices of Fannie Mae and Freddie Mac, but evident in the practices of banks elsewhere. The regulations that are now being imposed are supposed to make the banks practice safer lending habits. But that’s what the banks are doing, isn’t it? They’re just not lending very much at all, which is a safe bet, I suppose, in the short term.

The Obama administration is really sending mixed messages. The Fed and Treasury are supporting “easy money”, expansionary monetary policies. This is in hopes that more capital will be available to the public. But the policies enacted by the Executive and Legislative branches penalize the banks for trying to recover from Q1 of 2009. So what do they really want? You can’t blame the banks for staying still when they don’t know which way they’re supposed to move to avoid the pain caused by federal regulations.

I am well aware that we are in the midst of a recession. But is releasing massive amounts of money into circulation really the way to go? Irresponsible lending is what got us into this mess. And it’s not all the banks’ faults either; if unqualified individuals weren’t applying for the loans, the banks wouldn’t have been making the bad loans. Wouldn’t it make more sense for the Fed to raise the interest rate (which, by the way, would increase investment), the government to cut taxes and end all of the unnecessary programs and let people spend money that’s already theirs? That’s real recovery; spending money that one already has. Not buying on credit, which is exactly what the Fed and Treasury are pushing for.

So thanks, banks, for not lending. You’re doing us all a favor in the long run.

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3 Responses to “Why the Banks Aren’t Lending.”

  1. Jack Says:

    I agree with your view on the banks, and I do agree that it will not help our economy. However, as I have read several of your blog posts at this point I do wonder how you propose to fix the economy in general. In what regard would you hold a federal works project to rebuild our crumbling infrastructure? Think FDR. In that way wouldn’t it be possible to create tens of thousands of jobs (at least), and also bolster our economy and get people spending again? In fact, I would propose this over trying to reform health care (which at this moment would appear dead). I’m not saying this would be a cure-all to our country’s current financial situation, but it mayhaps would bolster it no? All I’m saying is could we not take a lesson from history for once instead of repeating the same mistakes?( As you also said about the banks learning as well.) On a side note, are you by any chance republican or libertarian because you would seem to be more the latter than the former and that is why I ask.

    • alyxwi Says:

      First off, I would like to thank you for taking the time to read my posts. I appreciate it very much. As you seem to have gathered, I am a libertarian, I suppose, though I occasionally lapse into a Republican mindset when the issue is national defense. As one would expect from a libertarian, I would hold a government-planned works project in low regard. I read an article recently—forgive me, but I can’t remember for the life of me where it was published—that explained why a New Deal-style recovery plan would not work now. Essentially, it said that the economic climate was fundamentally different—in the thirties, there was a greater number of unemployed Americans, more workers were required to produce the same output we do today and there was a much larger market for the unskilled laborerers and a larger number of agricultural jobs. The biggest difference, however, is that there was much less infrastructure then. We have built out or highways and bridges and roads expansively by now. I have yet to see an example of crumbling infrastructure, but even assuming that there is a great amount, those sorts of jobs are short term and cannot employ substantially. Plus, monetary policy at that time was exactly opposite of what it is now; the Fed was pursuing a contractionary policy. Bernanke, a student of the Great Depression, should have been expected to employ opposite tactics, even in a situation that had very little in common with the Depression.

      You asked what my plan was. As I said in my review of Mr. Bernanke’s actions, I don’t know exactly what to do. I am neither an elected official or an appointee, so the information I have is limited. However, with the knowledge and information available, I would raise interest rates in hopes of increasing investment, stop shoving cash at the banks, forgo the new banking regulations Obama has proposed, offer incentives—likely in the form of a tax credit—to small businesses to hire more people, cut payroll taxes and cut government spending in entitlements, discretionary spending and these worthless education “improvement” money-grabbing programs. It has been proved that the velocity of government money is about two or three turns, where private money velocity is closer to four or five. If the government really has money that’s burning a hole in it’s pocket, it should give it back to the taxpayers. Of course, they have to get it off of the presses first.

  2. Come Now, Mr. Krugman. Zombies? « Real Right Says:

    […] I stated earlier this year, the banks aren’t lending. All of the money they were given by the Fed is sitting in the […]

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