Hey, President Obama, Here's An Easy Way To Get Banks To Lend!

The whole premise of the Wall Street bailout was to keep banks alive so they could keep lending money to us. Remember that? It seemed like a such a nice idea at the time:

Banks are now not only not lending money to us, they're not bothering to attend meetings with the President in which he is begging them to lend money to us (because who wants to waste time going to Washington to be lectured by a bureaucrat when you can just stay home and mint money on a risk-free spread?)

And, more importantly, who wants to take the risk of lending to companies and individuals when you can make hundreds of billions of dollars lending money risk-free to the U.S. government?

The banks are just doing what any sensible lender would do right now: Taking the free money on offer from the government (taxpayers) and lending it back to the government (taxpayers) at a phenomenal markup of 3 full percentage points. And they're taking almost no risk, to boot!

As we explained the other day, this is a super-easy way to make billions of dollars and pay yourselves huge bonuses. It's so easy, in fact, that it's a wonder President Obama is even bothering to keep the charade alive that banks might voluntarily choose to lend to anyone who isn't guaranteed to pay it back.

But if the President is interested in actions instead of just words, here's an easy way to make the banks lend again:

“It’s a p.r. stunt,” says an executive at one of the banks that will be getting a dressing-down at the White House meeting.

http://www.time.com/time/business/article/0,8599,1947411,00.html

WSJ...

Wall Street fat cats are always a convenient political target, but bankers are responding to the incentives generated by the economic policies of the Treasury and the Federal Reserve. First and foremost is the Fed’s policy of near-zero interest rates.

What this means is that banks can raise short-term money at very low interest rates and buy safe, 10-year Treasury bonds at around 3.5%. The Bernanke Fed has promised to maintain its policy for “an extended period.” That translates into an extended opportunity for banks to engage in this interest-rate arbitrage.

Why would a banker take on traditional loans, which even in good times come with some risk of loss? In today’s troubled times, only the best credits will be bankable. Meanwhile, financial institutions are happy to service their new, best customer: the U.S. Treasury. That play on the yield curve is open to banks of all sizes.

The Fed’s policy makes sense if the goal is restoring bank profitability by generating cash flow. It is a terrible policy if the goal is fueling small business, the engine of economic growth and job creation. Large, nonfinancial corporations have access to banks. They can also tap the public credit markets and have access to internally generated funds. Not so for small business, which depends heavily on banks for credit.

Since the financial crisis began, the Fed has worked in tandem with the Bush/Paulson Treasury and now with the Obama/Geithner Treasury. One must assume its policies have the administration’s approval. That puts the administration’s policies at war with its stated goals. Larry Summers is a first-rate economist and must understand the economic incentives those policies have created. In short, the weekend interviews, along with the president’s meeting with bankers on Monday, was political theater.

http://online.wsj.com/article/SB10001424052748704398304574597910616856696.html?mod=WSJ_hpp_MIDDLTopStories

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.