The New York Times reports that banks have imposed tighter credit standards and are lending less freely to individuals and businesses than during the housing boom.
The most recent Federal Reserve survey of lenders found that they were continuing to tighten terms for business and household loans. Banks say they are under pressure from regulators to raise their cash reserves, which means fewer loans. They also argue that a troubled economy breeds extreme caution.
“More than ever before, lenders are very conscious of making good quality loans,” said Michael Fratantoni, the vice president for research at the Mortgage Bankers Association. “They are looking at the value of the collateral and the credit quality of the borrower.”
...President Obama, in his weekly address on Saturday, placed much of the blame for the recession on “the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences.”
The president is scheduled to meet with banking executives at the White House on Monday in another administration effort to increase the flow of loans to consumers and small businesses. Among those expected to attend are representatives from Citigroup, JPMorgan Chase, Bank of America, Wells Fargo and Goldman Sachs.
A few reactions:
First, the president ignores the real source of the recession.
Second, if the president desires to “increase the flow of loans to consumers and small businesses,” why damn the lenders whom he seeks to cajole? Businessmen and bankers who are under attack by the administration and by Congress, and who already have seen draconian measures imposed upon their fellow businessmen, are likely to be doubly cautious about risking new money in still unsettled economic conditions. Such was the situation under President Franklin Roosevelt during the 1930s Depression, when unemployment was never below the mid-teens.
Third, if the current recession is the fault of “large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences,” why push bankers to make more risky loans? All of the spurned borrowers described by the Times had loans greater than their house values, had poor credit records, had second mortgages on their homes, or already had too much other debt to service new mortgage loans. One would think that banks’ unwillingness to refinance loans or to make new loans in those circumstances is no more than basic financial prudence.
Fourth, Democrat/Socialist legislative and regulatory actions to spur consumer borrowing makes the recession worse. Excessive debt, assumed by the Federal government, businesses, and individuals, inflated the housing bubble and led to the implosion of financial markets. Why, by analogy, give a drunk a case of whiskey to cure his hangover?
The Democrat/Socialist answer is, citing the Times article:
The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession.
In other words, we are confronted again with the Keynesian economic thesis that consumers should go into more debt and spend, and that government action to that end is the only route out of a depression. Re-inflate Fannie and Freddie, and pump out the mortgage money without regard to underlying credit quality.
But isn’t that what was happening when the housing bubble burst?
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