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Can banks increase lending?

GR2009121500493.gifIf 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.

By Ezra Klein  |  December 15, 2009; 3:21 PM ET
Categories:  Economic Policy  
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Krugman isn't the only well-known economist pointing out that quantitative easing *cannot* bring about more economic recovery.

Further, Krugman isn't the only well-known economist that has asked, to paraphrase, "what will we do after the (fiscal) stimulus runs out?"

Posted by: HalHorvath | December 15, 2009 3:28 PM | Report abuse

I mention this not to suggest nothing is to be done, but rather that something else is to be done.

Posted by: HalHorvath | December 15, 2009 3:31 PM | Report abuse

I've never understood this.
by encouraging banks to make loans that they do not find acceptable on their own merits, isn't the administration (bent on reigning in excessive risk taking in other bank areas like compensation) actually encouraging excessive risk taking?
In many ways, recommending lax lending standards to the banks creates a dilemma for the executives. If you loosen your standards, and so does everyone else, all is good and your loans get paid back. If you loosen your standards and the others don't, your clients don't have the resources to pay you back. Alternatively, you can wait to loosen your standards until the recovery is entrenched, while not foregoing much opportunity cost. Which would you choose?
This is the predicament of our current situation and precisely the reason that economists forecast a meak recovery. The bankers will wait to lend, as they should.

Posted by: rt72 | December 15, 2009 3:45 PM | Report abuse

This argument is very, very tired as much evidence suggests that demand for loans is DOWN. You can hold a gun to bank's heads and force them to lend, but to who? Better yet, why? Is there something we need more of?

Posted by: slantedview | December 15, 2009 3:50 PM | Report abuse

All this yelling at banks, like Obama is powerless to do anything else but scold like a dissapointed parent, is ridiculous. The Federal Reserve Board is PAYING the banks to hoard money!!

Together with the Federal Reserve Board the United States Treasury Department has implemented literally dozens of programs to subsidize the short-term/long-term interest rate spread the two remaining investment banks are taking advantage of to reap enormous profits. I mean the return these banks are earning is literally unprecedented in the whole history of mankind. The Fed and Treasury have extended credit guarantees, bought billions in toxic assets, and permitted some, shall we say, questionable accounting practices.

If the Obama people want the banks to lend more maybe they should stop LAVISHING them with money. This whole: "the banks have paid back their TARP money so now we can't do anything," meme is complete and utter (word I can't say because this is a family newspaper). The main stream media needs to do a better job explaining this. That includes you Ezra.

Posted by: nklein1553 | December 15, 2009 4:28 PM | Report abuse

Fairy Tale Land

Bankers are overjoyed at the idea of spending their time and effort on making loans, instead of the exciting large bonuses that can be made with buying and trading Wall Street paper with bank deposits.

There are rumors that the new sleeper this year for bankers will be the release of "The Inner Joys Of Making Loans".

The Cash for Caulking program of the President is a result of an in depth review by government economists of the Great Leap Forward of Mao.

There are plenty of non-exportable jobs in America to make up for the tens of millions of jobs using computer technology that are being exported.

Government is ablaze with the idea that the jobs for Americans in the 21st century, are not the jobs in computer technology, but the jobs of insulation and caulking.

There is even a new government pamphlet "Building Your Business Without Computers".

The Tooth fairy is hiring with plenty of non-exportable jobs this year after getting a business loan from the banks.

Posted by: bsallamack | December 15, 2009 6:33 PM | Report abuse

Why don't they just pass a law that makes maximum reserve requirements for banks and give the Fed authority over what the maximum number is?

Posted by: kazumatan | December 15, 2009 10:04 PM | Report abuse

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