Bank Bailouts vs. Loans: The 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.

Comments

[LariAnn:]

Interesting that taking money from the taxpayers and giving it to the banks is called "saving the banks" while the idea of giving most taxpayers a tax break and making taxes higher for the rich is called "socialism" or "spreading the wealth". People need to wake up.

2008 Oct 29 09:49 AM

[Jason Rines...:]

Both are socialism Lari! But that was the path chosen long ago about housing, that all people should be qualified to own one regardless of the financial ability to afford a mortgage. Of course, 'fairness' politics is very rarely about helping the citizenship, but it is about government officials accepting lobby cash and making large returns on personal investments by legislating or deregulating sectors.

Neither major political party has been truly interested in helping the people. The meaning of the word public servant these days is officials asking what a group has done for them lately.

2008 Oct 29 11:04 AM

[CrisisTheory:]

Gotta hate all those socialist firefighters, police, soldires, highways, hospitals and schools, too.

2008 Oct 29 11:20 AM

[steveballmer:]

I don't like any of this stuff that's going arround right now!
Government banks? BAD IDEA!
Spreading the wealth? Who's wealth? How much of it? Who gets it

2008 Oct 29 12:25 PM

[Socialism c...:]

Right on, iThinkBig!!! An historical note regarding socialism in the U.S. -- the Founders were very much against it, as they believed strongly in personal property rights! The settlers of the Plymouth colony in fact tried socialism, with everyone putting into the common store what they were able to produce, and everyone taking as much as they "needed". They found it didn't work -- they had problems with a segment "discovering" that they need not work very hard at producing, and could just go take what food they needed/desired. They scrapped that setup, and sectioned off plots for each family to farm -- the new arrangement was that you got to keep what you produced, and could sell any excess you didn't need. Worked fabulously.

People need to take some basic philosophy and logic classes again, in this country! Not to mention history! Read what Jefferson et. al. wrote...they were for minimal government and would never have stood for an income tax! The government having a pre-emptive claim on your earnings? Uh-uh. The philosophically acceptable way for the government to get its limited funding was consumptive taxes -- sales tax & import tariffs. Those leave it up to the *buyer* when and how much tax they pay, based on their purchase decisions. You don't like how the government is currently spending? You stop all discretionary buying for a while...shut off the spigot!

We've lost a couple basic concepts in the U.S. over recent decades: personal property rights are rapidly vanishing, and government by the people, vs. government *over* the people! Both are largely solved by abolishing the income tax and going solely consumptive, along with a balanced-budget, pay-from-the-coffers government.

@LariAnn: in short, there should be a tax break not only for the rich, but for all -- because the government *never* should have had a pre-emptive claim on our income!!

2008 Oct 29 12:33 PM

[MB221:]

Socialism cannot compete! pretty much hit the nail right on the head as far as income taxes go. I STRONGLY recommend checking out the history of the income tax in the U.S. -- what you find will likely surprise you (Example: The U.S. SUPREME COURT decided in 1895 that the Income Tax was UNCONSTITUTIONAL. The constitution hasn't changed since then.... so what mad the government decide it was OK to be unconstitutional in the name of prosperity?? Answer : Greed.)

I firmly believe a restructuring of government revenue is in order if we hope to reduce its ever-growing power (and not surprisingly its ever-growing debt). Abolish income tax altogether and possibly increase sales tax on a marginal basis (say higher rates for more expensive and "luxurious" non-necessity goods/services) to keep both the government AND consumer modest in their spending practices and thus increasing economic stability. Although this may sound great in theory, I believe the reality is that we are past the point of no return and nothing short of a revolution would change the minds of the current governing body.

Type in "History of the income tax" at your favored browser and do the research yourself.

2008 Oct 29 01:29 PM

[Socialism c...:]

@Snu: Agreed. I think the way we solve the issue of sales tax affecting the poor more harshly than the wealthy is by the means you suggest: no, or very small, sales tax on essential items such as food and clothing; discretionary consumer goods can be taxed at higher rates. This will also have the side-effect of causing us to think twice about wasteful and excessive consumption in our lifestyle. A true win-win that restores freedom to the people while also helping reign in our tendency to live excessively and with a big footprint.

I also happen to think you are right about "nothing short of a revolution" being able to bring about this needed change: there is now too large of an entitlement class, and we are seeing a candidate be able to run solely on that basis. He has no other valid standing, that much is clear.

2008 Oct 30 01:31 PM