Can banks increase lending?
If economic growth is going to pick back up, banks are going to have to start lending more money. After all, loans drive investment, and investment drives growth, and growth drives jobs. Barack Obama thinks this important enough that he invited some bank CEOs over to yell at them about it today.
But as my colleague Binyamin Appelbaum notes, this may require more than some standard issue jawboning. "Bank executives say they itch to make profitable loans, as many as possible, but are struggling to find qualified borrowers," says Appelbaum.
The issue of "qualified borrowers" deserves a bit of explanation: A conversation I recently had with a former board member at a big bank clarified this a bit for me. One of the features of the run-up to the crisis was that banks loosened lending standards, bending the rules to make loans to people who didn't quite qualify. Maybe the business had $1,200,000 in revenues, but not $1,250,000, which was normally required for that loan.
That laxity has given way to an uncommon rigidity. You qualify according to the letter of the loan, or you don't get the loan. Of course, in a recession, fewer people qualify for good loans, and fewer people are willing to take the sort of risks that lead them to ask for new loans (although, as James Surowiecki has argued, those who are willing to invest amidst a recession often secure huge gains).
In other words, more people will take out loans when the economy improves. The economy won't improve because more people begin to take out loans. The chicken comes after the egg. Banks can increase their loan targets a bit, and walking out of the meeting with Obama, some did exactly that. But what will really accelerate recovery -- and thus lending -- is a serious shot of stimulus (or quantitative easing), not a meeting with the president. The government can step out from the trends depressing the broader economy. The banks really can't.
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