Tuesday, January 20, 2009

About the Whole "Making Banks Lend" Thing....

From the blog Information Arbitrage:

Forcing banks to lend couldn't be a more intellectually bankrupt idea. The business of commercial banks is to lend money when the risk-adjusted returns exceed its cost of capital. Just lend money, because we said so? We've seen this movie before - it's called Fannie Mae and Freddie Mac - and it doesn't end well. The right way to approach the problem is to create truly healthy banks, either out of currently sick institutions or de novo, and to let them make rational lending decisions. If the Government sees a particular constituency that requires funding, don't force a bank to do it if it doesn't make economic sense. Either create a discrete program or use tax incentives to generate the necessary resources. The worst possible outcome of TARP is to create another generation of sick institutions by forcing them to make irrational loans to satisfy the moral (or public relations) objectives of our Government representatives. Obama needs to fight this urge with a vengance.

While I respectfully disagree with his statement about Fannie and Freddie, I agree wholeheartedly with everything else stated. You can't force banks to lend. Doing so will only lead to a host of other new problems.