Remember, during the presidential campaign, how we all kept going on and on about how smart Barack Obama is? Remember?
Turns out we were wrong! I can’t speak to topics like foreign affairs or macroeconomics, but I do know about banking. And I will say flat out that Obama’s approach to dealing with bankers and the banking industry has been brainless. It is shocking to see what the guy appears to not know.
On Monday, the President summoned the heads of the country’s big banks to try to jawbone them into lending more. “America’s big banks received extraordinary assistance from American taxpayers,” he said after the meeting. “Now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild the economy.”
Really? If the President wants the banks to start lending more, he might spend less time yammering at CEOs and more time talking to his own regulators. They don’t seem to have gotten the memo. Instead, regulators are apparently doing all they can to ensure that banks keep their lending to a minimum. For example, they now seem to be insisting banks maintain minimum capital standards meaningfully above the published, official bogeys. Before the credit crunch hit, for instance, OCC policy said a bank would be considered “adequately capitalized” if it carried a Tier 1 capital ratio of 4%, and “well-capitalized” if it carried a Tier 1 ratio of 6%. It was simple. Right there in print.
And now—who knows? Regulators won’t come out and admit they’ve moved the goalposts but, as multiple conversations I’ve lately had with bank CEOs show, they have. Now, apparently, it takes a 10% Tier 1 ratio to be considered well-capitalized, and regulators don’t mind if banks are even a tad over that. This is not an official policy change, remember, but rather a de facto shift that’s happening at bank after bank across the country.
Mr. President, the arithmetic couldn’t be simpler: the higher the capital ratio, the less credit is available and the more it costs! So if you want more credit to flow into economy, tell your regulators to stop the freelancing and stick to their published policy. It should be a short conversation. They work for you. You might also tell them to ease off their tactic of forcing banks to downgrade (and take added reserves for) loans that are current and cash-flowing. Each loan is different, of course, but if a borrower has managed to stay current to this point in the cycle, his lender isn’t necessarily being imprudent if it gives him the benefit of the doubt. Otherwise, banks will have to take redundant reserves and will have less capital to use to facilitate lending. This really isn’t hard.
President Obama’s ignorance of how banking works seems to be nearly encyclopedic. He accuses the banks he spoke with Monday of playing a big role in causing the credit crunch. For the most part, they did not. (The main culprits have all long since collapsed.) He says the big banks should be grateful for the “extraordinary assistance” they received from the government. But except for Citi (C), none of the big banks even wanted the money. He keeps pushing this misbegotten Consumer Financial Protection Agency. But the effect of the CFPA would be to constrict credit, not expand it. His understanding of reality seems to be upside down and backwards.
It’s also jarring to hear the President talk about the “extraordinary commitment” he expects lenders to now make. The last time the government wanted that kind of concerted effort from the lending industry, things didn’t turn out so well. Then, the goal was the expansion of home ownership—everyone from President Bush to Barney Frank was all for it—and the key tool banks used to get there was an emphasis on subprime lending. I don’t need to remind you how that ended.
The banking business isn’t complicated. Banks borrow money at one interest rate and turn it around and lend it at another, higher rate. If enough borrowers repay their loans, banks will turn a profit and will be able to lend even more. A kind of virtuous circle will ensue. If enough borrowers don’t repay their loans, all hell breaks loose. That’s why political meddling in the lending business (that is, elected officials lobbying bankers to make uneconomic loans) can be so toxic to the economy. I don’t get why President Obama persists in meddling now.
Nobody is asking Barack Obama to turn into the second coming of J.P. Morgan. But he might at least grasp the basics. Can’t any of the economic graybeards who endorsed him last year pick up the phone and explain the way the world works? We’re told he’s very bright. It wouldn’t likely be a long or difficult conversation.