banks

Banks trying to recoup from bad loans and inadequate reserves urged to lend

by Fran Smith on February 24, 2010

in Economy, Regulation

There’s a juxtaposition in a Washington Post article today that deserves a “Wha?” The article focuses on the huge drop in bank lending in 2009 – 7.5 percent or $587 billion – a plunge that hasn’t been seen in more than a half century.  Sheila Bair, chairman of the Federal Deposit Insurance Corporation, is quoted:

“But Bair said that the vast majority of the lending decline was the result of cutbacks by the nation’s largest banks, which have tightened qualification standards for borrowers and increased the proportion of money that they hold in reserve against unexpected losses.

‘Large banks do need to do a better job of stepping up to the plate here,’ Bair said.”

Didn’t indiscriminate lending and inadequate provision for loan losses contribute to the financial meltdown?  In this uncertain climate, isn’t it a good idea for banks to tighten their lending standards and increase their reserves? But, no, stimulating the economy is the game du jour.

Increase small biz lending not gov spending

by Michelle Minton on February 16, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Stimulus to Nowhere

President Obama seems to genuinely want to help people and improve the economy. However, he also seems to genuinely believe that the best and most effective way to accomplish these goals is through government intervention and wealth redistribution. In his State of the Union address, President Barack Obama pinpointed several particular policy-goals, one of which was to stimulate increased lending to small businesses. How does Obama propose to encourage such lending? Someone with a different perspective might look for ways to remove regulatory barriers to increase lending, but President Obama’s plan is to simply shuffle $30 billion in TARP funds to community banks, no doubt with many strings attached.

However, there’s a much simpler way to increase small business lending, one that requires zero taxpayer dollars and presents no risk to the financial system: allow credit unions to increase their lending to small businesses and low-income residents.

Throughout the economic crisis, while banks and other financial institutions withdrew lines of credit and gave questionable bonuses to their executives, credit unions have continued to lend. They could lend even more if not for the regulations that prevent them from doing so.

Like banks, credit unions offer a mix of financial services, including checking and savings accounts (credit unions  call them “share accounts”), credit cards, and loans. However, credit unions differ from banks in that they are limited to serving a specific consumer base, known as their “field of membership.” This could be defined as the employees of a company, residents of a defined geographical region, or members of a church.

Credit unions are also more limited than banks on the types of loans they are allowed to write and the rates that they may charge. Additionally, credit unions are non-profit organizations that do not seek to generate a profit and do not pay federal income taxes-any returns earned from member business lending is returned to the members or used for the operation and growth of the credit union.

Credit unions have been fighting for a decade to lift the cap on the amount of lending that they are allowed to engage in. As recently as September 2009, the Credit Union National Association issued a letter to the president asking for him to support a measure in Congress that would life the cap on credit union business lending from 12.25 percent of their assets to 25 percent and that would allow them to include “underserved” areas as part of their field of membership. The bill, the Promoting Lending to America’s Small Businesses Act of 2009 (HR 3380), has been stuck in the House Financial Services Committee since July 2009.

Increasing credit unions’ ability to lend will not solve all of our economic woes-they control only around 6 percent of the country’s total deposits. However, freeing up credit unions to use their capital to stimulate and sustain small businesses can only help, and it will have a significant impact on areas of the country underserved by banks, at no cost to the taxpayer.

If Congress and President Obama are serious about increasing access to credit right away, they should focus less on redistributing taxpayer dollars and more on freeing the institutions that have capital and want to lend to small businesses.

Regulation of the Day 102: The Size of Banks

by Ryan Young on January 21, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Regulation, Regulation of the Day

Louis Brandeis was a hero of the Progressive Era. One of the central tenets of his philosophy is that when it comes to business, big equals bad. Even if consumers benefit. Doesn’t matter. Big is bad.

This is not an exaggeration. Business historian Thomas McCraw wrote that “a deep-seated antipathy toward bigness clouded his judgment.”*

Then there is Brandeis on consumers: “servile, self-indulgent, indolent, ignorant.” That’s a direct quote, by the way.** It was his justification for wanting to fix prices in favor of small businesses. Consumers invariably prefer low prices. The problem is that sometimes big businesses offer those low prices. And this upset Brandeis to no end. How dare consumers take price into account! The size of the business is more important!

This is not a rigorous line of thought.

But it’s one the current administration has bought into. The White House is expected to propose today a maximum allowable size for banks. Because big is bad.

This reform is unlikely to have its desired effect. The reason banks behaved so badly during the housing bubble is because the regulatory and political climate gave them an incentive to. It had nothing to with size. The solution, then, is to channel incentives in a better direction. Reward good behavior. Punish bad behavior. Any reform that ignores incentives will fail every time.

On one hand, as long as bankers know that the government will bail out their losses, they’ll take as many crazy risks as they can. Where’s the incentive to be careful if taxpayers will cover the bill when you mess up?

On the other hand, a size cap might actually make banks too risk-averse. Loans are risks taken in the hope of future profit. But too much profit — too much good lending — could potentially make a bank run into size problems with the government. This is not the kind of incentive structure the administration should be shooting for.

Today’s fixation on size is just as misguided as Brandeis’ was. Consumers and banks alike would be better served by letting profits encourage risk, and losses encourage prudence, as Russ Roberts put it. That means no size restrictions. No bailouts either.

*Thomas McCraw, Prophets of Regulation, p.99.
**McCraw, p. 107.

Fred L. Smith, Jr. on Credit Cards

by Richard Morrison on May 12, 2009

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=rKNBLsEzJmw 285 234]

John Berlau Debates Credit Card Fees and the Bank Bailout

by Richard Morrison on April 15, 2009

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=WBJrkn_kJw8 285 234]

Should the U.S. Government Nationalize “Broken” Banks?

by Richard Morrison on February 3, 2009 · 1 comment

in Bailout Watch, Economy

Such is the title of the latest BusinessWeek.com debate. Taking the “con” side is CEI’s own Eli Lehrer, who argues (in part):

Long-term government bank ownership, in any case, would simply make the country poorer. Banks actually create money when they lend it out, but doing so only has positive overall economic consequences when the loans get repaid. Government-owned banks would face enormous, understandable pressure to lend to politically powerful groups and industries that can’t reasonably repay their loans. Even the best managers couldn’t overcome this pressure.

Even in the “post-partisan” paradise of the Obama Era, public choice still matters!

*Photo credit: Declan McCullagh.

D.C. Event: BB&T’s John Allison on the Financial Crisis

by Richard Morrison on January 15, 2009 · 1 comment

in Bailout Watch, Economy, Stimulus to Nowhere

Our friends at the Ayn Rand Center for Individual Rights are hosting what promises to be a fascinating public lecture on the state of the U.S. economy and what it means for the future of capitalism. Former CEO and current Board Chairman of BB&T bank, John Allison, will explain the interventionist government policies that brought us where we are today and their anti-capitalist underpinnings.

Location and Details:

The Financial Crisis: Causes and Possible Cures
Thursday, January 29, 2009

National Building Museum—Great Hall
401 F Street NW
Washington, DC 20001
Red Line Metro, Judiciary Square

Doors open: 6 PM
Lecture and Q & A: 6:30 PM

This event is FREE and open to the public.

Thank You, 2008, and Good Riddance!

by Iain Murray on December 31, 2008 · 22 comments

in Bailout Watch, Culture, Economy, Energy, Environment, Features, Global Warming, Politics as Usual, Zeitgeist

For supporters of freedom and markets, the Year of Our Lord 2008 has been close to a disaster. As D:Ream used to sing, things can only get better, surely? Ah, if only…

This was the year that saw two Presidential candidates vying with each other to see who could make the most ridiculous statements on global warming and the financial system (it may be the less ridiculous won). It was a year when one bunch of free-spending economic know-nothings gained complete control of Congress over another bunch of free-spending economic know-nothings. This was the year the American polity compromised and became both stupid and evil.

2008 was a year when America lost its mind over energy. As energy prices spiked thanks to (as we now know) artificially inflated demand, politicians mostly discussed ways to make them higher still. No energy idea was too stupid for someone to be praised as a genius or visionary for proposing it. Oil companies fell over themselves to make adverts telling people not to use their main product. Congress told American car makers they weren’t making the cars people wanted to buy, so they were going to make them do it or fine them into closure. Car makers responded by demanding money from the taxpayer. Congress agreed. The invisible hand was thereby nailed to a Congressional table. For one brief, shining moment, it looked like even this Congress would be forced to relax idiotic restrictions on oil exploration, but “Drill, baby, drill” was retired as the oil price collapsed and so we will have to go through the whole thing again on the next oil price spike, when we will be told it is too late to explore and drill (again).

This was the year when every energy-snake-oil salesman realized that “green jobs” was the magic phrase that unlocked taxpayer wallets. A vast army of careers in the compact-light-bulb-changing industry awaits America’s youth. The progression from trainee light-bulb-changer to assistant-light-bulb-changer to certified-light-bulb-changer to lightbulb-changing-supervisor to lightbulb-changing-regional-manager to lightbulb-changing-firm-CEO to lightbulb-changing-Czar will tempt the most ambitious young people (even if most of the actual changing will be done by recent immigrants from Mexico). The 500,000 extra unemployed as a result of the “green jobs” scam will at least be able to pat themselves on the back that, by losing their jobs, they have reduced global emissions infinitesimally.

2008 was the year when the housing-market-of-cards erected on the shifting sands of decades of congressional and administration pressure to lend fell down spectacularly. The market that had reacted to government signals got all the blame, when it only deserved some of it. The guilty parties in Washington not only got away scott free, but are now writing the rules for another iteration of the manifestly-failed Mixed Economy. As for a free market in finance, that has been completely ruled out even though it’s never actually been tried.

This Annus Horribilis also saw the rise of Bailout Nation. With asset values collapsed, the investors who had speculated and lost knew they had one way to keep their pockets full – by getting their cronies in the Administration and Congress to take money out of the pockets of taxpayers and give it to them. A Congress full of people supposedly friendly to the middle class agreed. Trebles and bonuses all round! With Wall Street the most despised thoroughfare in America, one Wall Street Panhandler masquerading as a Treasury Secretary is to be replaced by another. That’s change I can believe in.

In my native Britain, the 55th year of the Queen’s reign saw the Conservative Party reap the rewards of acquiescing to New Labour’s mixed-economy economic policy. When British banks collapsed, and a sterling crisis deepened the trouble, they were left with nothing to say. Gordon Brown, the man who promised he had put an end to “boom and bust,” blamed the bust that followed his housing boom on America and Margaret Thatcher and thereby managed to improve his opinion poll rating to the level where people were speculating he might call a General Election. The British voter, after all, knows he is a safe pair of hands with the economy. At least some over there, however, know what the real story is.

As 2008 draws to a close it has proven to be the coldest year in a decade and it seems that tropospheric temperatures are beginning a downward cycle again. Never, however, has the political establishment been so united in deciding that urgent action is needed to save us from ever-rising temperatures.

2008, you were a rotten year. No-one likes you. Go away!

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