Put the Bankers Back to Work

On a bailout-funded expense account, our financial sector is taking a paid vacation. Despite a $350 billion recapitalization, intended in large part to keep credit flowing, bank lending to small businesses in the last three months has fallen 68% from 2007. Some decline from the heady boom days is inevitable and even desirable. Yet this dramatic collapse of credit has left even sound businesses unable to make payroll or purchase equipment. As a result more than two and a half million jobs have been lost in past months. Consumers, unable to finance purchases, have shut their wallets.

To prevent the financial sector melt down from further strangling the economy, the Federal Reserve, and to a lesser extent Congress, have become lenders of first resort. The Fed has taken unprecedented actions. Solely responsible for monetary policy, central banks typically hold only government bonds. Yet today the Fed has offered a wide variety of loans to private businesses. It has purchased more than $300 billion in short-term "commercial paper" bonds to private businesses and made $400 billion in "term auction credit" available to banks. Most mysteriously it now holds almost $800 billion in new and unexplained "other loans" and "other Federal Reserve assets" lent out to various institutions. Without a private financial system to fall back on, the American car industry and even pornographers have come to Congress for cash.

This represents a major failure of the Troubled Asset Relief Program (TARP). The TARP gained broad support largely because the financial sector is fundamentally different from other sectors in that it facilitates the function of all industries. Unlike movies and cars, which are either inessential or have close foreign-made substitutes, the financial system is truly the lifeblood of the economy. Banks have the skill and experience to determine which businesses and consumers should receive loans. Their relationships with borrowers give banks leverage to keep their clients running efficiently and ensure loans are repaid.

Admittedly much of the credit crisis was caused by the failure of banks to do their job well. Yet the prospect of erasing these years of established expertise and training is terrifying. Most experts thought it was a fool's wager to allow the Iraqi army to be disbanded in the hopes that something better might come in its place. For the same reasons, substituting Fed and Congressional lending for a functioning banking system seems a risky gamble indeed.

The Fed and Congress may be good at managing monetary policy and passing laws, but they are not loan officers nor bond investors. Parceling out credit requires painful choices of winners and losers that the political process is ill equipped to make. Nor does the government have teams of thousands of trained analysts to help them evaluate and negotiate investment opportunities. Most importantly, if we trusted Congress and the Fed to be lenders, then why did we spend a quarter of a trillion dollars to save the banks?

Because the bailout came with few strings attached, the public has gotten little in exchange for its generosity. Remaining TARP funds should be dispersed on the condition that banks resume lending in crucial sectors. Rather than free money, the government should offer lending subsidies, incentivizing the investment we need to get our economy moving again.

Some would argue that further subsidies to banks would reward bad behavior or fail to achieve needed coordination. The more radical approach of temporary nationalization would certainly bring some additional benefits: protecting taxpayers by securing additional equity, allowing a centralized audit of bank balance sheets, silencing banks' lobbying arms and ensuring that the recent wave of consolidation could be reversed. Yet it would also bring the classic risk of government ownership: political interference in lending decisions.

However, either solution would be better than the current morass, which combines the worst of both worlds. Today, de facto, the government is the source of most lending. Yet they do not have the resources or expertise to play that role. The bankers who do are sitting on their hands. The public deserves the banking system they paid for with the TARP. Because millions of American jobs depend on the banks doing theirs, the first step to getting America moving again is to put the bankers back to work.

Comments

[drymartini1]

in this market, ONLY A FOOL WOULD LEND MONEY !!

[oldguru]

Keep these crooks in charge of the banks that they have looted? I think not! Their main talent and expertize as you call it is in deciet and greed. They have proven that they intend to continue their profligate lifestyles no matter what. Unless someone can figure out how to perform an ethics transplant on these guys, they should only be allowed to control a shovel and pick on the taxpayers dime. There are plenty of HONEST people who can step in to run these banks.

[raechel]

Sure does make it easier to get through life if you can reduce everything to bad guys and good guys, crooks and victims.

[joebhed]

""Today, de facto, the government is the source of most loans.""

A little ironic, no?

The checkbook of the taxpayers is bankrolling the salvation of the private banking industry that brought is this financial violation.

To me the only way for the taxpayers to provide the funding to support the revitalization of the financial services industry is through a debt-free government issue of all of the nation's money.

To do so would put all bankers back to work in a slightly different environment.
Banks would have to lend, and therefore to risk, real money.
Real money is money that has been deposited into the banks after the monies paid out by the government (taxpayers) to its people and companies that do business with the government have made those deposits.

The object, of course, would be to create new demand directly at the consumer and business level, as opposed to the banks.
There would be no deficit spending.
There would be no debt to repay.
There would be no interest due.
There would be no increase in the National Debt.
There would be a decrease in taxes.
There would be a reduction in inflation.

Either that, or we can bail out the banks.
Up to you, America.