The Banks Fault?

Banks are not lending. That is what Americans are being told. Credit is tight and therefore the economy is having a difficult time getting any traction. That’s number two for the Banks. First they precipitated the financial crisis and consequent recession. Now they are doing their best to act righteous and are holding back on credit. Their lack of action is killing the economy.  What should we do with banks?

How can you blame Banks when just a few years ago they were giving out money to anyone (and in many cases with no documents). Banks got burned and received a lot of unfavorable press coverage. Why shouldn’t banks be more prudent on who they loan to?

The answer is Banks should be prudent (and should have been long before the housing bubble burst). A better question might be, what should banks do with funds they receive from FDIC insured deposits? Or, what should big banks do with funds they borrow from the Fed?

In one way or another, these are public funds back by tax payers guarantees. Under this light, these funds should be used only in building a common wealth application (read create jobs). For example, banks using funds from these sources should be encouraged (maybe required but probably an onerous tax penalty could also work) to invest in small businesses and home construction. In essence, money from these sources could  only be used for this type of purpose. It could not be used by banks to buy bonds or any other proprietary trading purpose. Banks, of course, could still  get funds from investors who would not receive FDIC protection, and then invest in what ever they chose. The point here is that Federal cheap money and insurance protection should be only for funds that would be used to make investments in the common wealth (jobs).

So, what if banks still felt they could not find sound deals in the common wealth area? The simple answer is that they should not make deals just to make deals. I suspect, however, that small banks that know the local market much better, could fill in the gap nicely. Anyone who has dealt with the large banks recently has experienced an attitude that screams out their disdain for small business and mortgage loans. It is very possible that the large banks we are familiar with are like General Motors and will not be able to reform until bankruptcy sets in.

In the 2000s, Banks were primarily interested in mortgages and business loans only if they could repackage them and sell them as bonds (or CDOs). It was the resale where they cleared their books of the risk while collecting large fees that was the beef in the sandwich, not the mortgage or loan.

Like when a field is overgrown with weeds, a controlled grass fire will bring back fresh and vibrant growth.

Explore posts in the same categories: Barack Obama, Democratic Party, Politics, Republican Party

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