Tuesday, October 28, 2008

Incompetence in action: White House tells banks to stop hoarding money

An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.
"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said.

Though there are limits on how much Washington can pressure banks, she noted that banks are regulated by the federal government.

This is government incompetence at its very best. And on so many levels.

On one level, this is the reason the banks are in this mess in the first place. They made foolish loans that weren't backed by adequate collateral or were given to people with lousy credit and incomes. Now the banks have started to learn their lesson and the government now wants them to go back to making irresponsible loans.

On another level, it's just a fallacy that banks aren't lending. Banks are lending. There is a market for all kinds of loans. The Feds are just angry that the interest rates are too high. There is a market for debt with buyers and sellers of that debt. The banks are the buyers of the debt in this case and they are making their bids. Borrowers are setting the asks. The amount of debt and the price (interest rate) is based on the market clearing price for the debt. The government is just angry that the interest rate isn't lower. But the reason the interest rate is high is because the banks are finally starting to factor in the real risk of defaults. 

On the next level, the government has made this mess much worse. I am not even talking about the fundamental causes of the credit bubble and the subsequent crash. I've talked at length in this blog about that. I am talking about the proximate cause of this problem. The government has created an alphabet soup of lending facilities. They are now directly buying commercial paper. Debtors know that they don't have to borrow from the banks at market rates when they can borrow from the Fed at below-market rates. I wish the Fed would start a facility for buying Google stock. I would much prefer selling shares to the Fed at $700 than at current market prices.

This is right out of Atlas Shrugged. It would be amusing if it weren't so sad and frightening. Welcome to socialism.

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