Bank Bailouts and the Loans Myth

Since my friend Joe Nocera first wrote about it last weekend in the NY Times, I have seen a spate of other articles all saying that bank executives are bad people for taking money from the U.S. Treasury and not ramping up their lending.

Trouble is, that’s wrong-headed. Recall, the intent of the bank capital infusion was to backstop banks so that insolvency fears would be reduced, or even eliminated. While solvent banks will eventually make loans, it is meddlesome and illogical to say that having made injections we should now be tapping our collective feet at bank unwillingness to extend more credit than they are.

Banks are looking at a changed world, one with deleveraging everything, consolidation happening apace, and defaults almost certain to rise rapidly over the next 24 months. Imagine that despite all of this banks began “business as usual” lending. What would happen? Almost certainly the banks would see higher levels of non-performing loans and defaults on these new efforts, perhaps even to the point that they would require more capital to reduce solvency fears. And what would we say then? We’d say, “Idiots, why did you race out and loan the money that we gave you into this weakening economy?”


Now, was this bailout sold properly, with people told that banks shouldn’t and wouldn’t begin lending straight away? No, it wasn’t. Nevertheless, reasonable people should have been able to figure out on their own that giving banks capital just so they lend it out again into a deleveraging economy is absurd. We were trying to save the banks, not screw them up worse.