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The case against forcing banks to lend

January 21, 2009 by  

Is easier credit a good thing?In the current economic climate, it is common to hear people speak about the need for banks to relax their lending standards and start approving loans again.

But is this really a good idea? Writing for CNN Money, Paul R. LaMonica argues that if financial institutions lend for the sake of it, the country will have a more difficult time pulling itself out of the crisis.

Instead, banks should use the funds from the Troubled Asset Relief Program to shore up their balance sheets and protect themselves against the fresh wave of credit defaults that are around the corner, he says.

Considering that irresponsible lending was a cause of the current recession, it would be a mistake to re-start a system of lending to people who cannot afford to pay the money back, according to LaMonica.

Daniel Alpert of investment bank Westwood Capital, called for a rethinking of "so-called stimulus."

"I don’t think massive consumer spending is the way out. The country needs a pickup in savings and investments in the future," he told the news provider.

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  • Bob Livingston

    The banks have so far taken advantage of the “bailout” by building up their balance sheets but they still refuse to lend to each other (other banks) or to individuals. It’s like old times, you have to prove you don’t need the money to get it, and then they won’t lend it. I suppose the deadlock will have to be broken by the government. It’s hard to see any difference in the bailout syndrome and going another step to get the economy going by insisting on the banks lending. However, we may be looking at the wrong thing. We should be looking for a banking index breakout. This would signal the improving financial environment that would give banks the incentive to loan.

  • jim

    It is clear to me why mr. Lamonica wishes that banks be independant from the government in their lending practices. Banks just received a load of free money for their ‘balance sheets’ and they are quite content. Why should they take some risk in lending all those free dollars that the taxpayers will have to pay for? it is like giving a child a thousand dollars and asking that child to spend the money in the name of goodness. do you actually think that child will donate the money to United Way or March of Dimes. I doubt it. And all this time I thought that banks were chartered for lending purposes.

    • bob

      Jim thinks, like a lot of folks, that banks just got free money from the govt/taxpayers, so they should lend it. Jim is wrong – the govt loaned banks this money and banks are paying the govt 5% interest for 5 years, then the interest rate jumps to 9% if they don’t pay it back then. So its not free to the banks, and the taxpayers probably will make money on these TARP loans to banks not only from the interest but also the govt got some equity in the banks so if banks survive and prosper the taxpayers should make money on the equity too.

      • Herbert Levinson

        You have a dream. We shall soon see what’s true!

        • Jeff

          Sounds more like a nightmare to me. There is two words in this post that is used alot in politics these days also–”probably and should”. Only one thing could be better and that is Fannie Mae and Freddie Mac run this program also.

        • Herbert Levinson

          I must have hit a raw nerve!

          What would a better test, if it were possible? Than, to look into the future and glean, the truths of the past.

          I think this is an appropreate conclusion, to visualize the truth.

          We have tried the Republican way, for eight years.
          That’s what caused these present Bush economic problems, in the first place.
          Don’t you remember “Haliburten” and all the money they stole, during the present wars, We are now engaged in.

          Then, they moved to the middleeast to escape the rath of the American taxpayers.

          Bill Clinton illiminated the deficit during his tenure, in the Whitehouse.
          So, “We shall soon see what’s true”! is an appropreate response, to what we’ve seen, happened in the past, with a Republican president and Legislature!

          That’s how humans learn!
          We examine the past and built on it. This case is no different.

  • http://None Richard Jauch

    Would this work? Instead of the government bail-out program buying the full mortgages of folks who can’t pay their monthly payments allow the homeowner to pay what he can (he must make some monthly payment from pocket while he lives in the house) and take a reverse mortgage type withdrawal from the Govenrment Bail-out plan for what he can’t pay. The amount is charged against the eventual net value of his house when he sells it, just like a second mortgage. If his times get better he can make his full payments plus some extra to pay off the “reverse mortgage”. If not, when he sells the house the most the bail-out program can lose is the amount of the reverse mortgage account. The original lender can hold the mortgage, and get their monthly interest payment. As it is it appears that the government bail-out program is buying the entire loan instead of just lending a small amount each month to save the mortgage. My plan would put the losses back on the mortgage company’s investors who made a bad investment, not the taxpayers who had no part of that investor’s bad choices.

  • http://at7&t unique

    Why should I save? What is the interest rate for savings?

  • Duane

    Unproductive and/or unethical institutions should not be rewarded with bailout money in a democratic, free enterprise capitalist system. If such money is available for such waste and hypocrisy it should be made available for jobs and related needs.

    I cannot think of a more expeditious, simple and fiscally healthy way to stimulate savings and ultimately spending than to to replace our outdated income tax system with a spending tax system. Our government with spending tax receipts could then immediately pay back Americans and the Chinese government debt.

    Cowboy up you wimpy politicians!

    • Jeff

      What a geat posting, just one problem, you forgot to capitalize the word “Wimpy”. HaHa

  • Veracruz

    One thing that has not been mentioned during all this talk about a “bailout” and that is the culpability of those who caused the problem. The heads of Fannie Mae and Freddie Mac all but admitted their guilt during government hearings back about two and a half years ago yet no one said a word. It was clear through watching these hearings on Cspan that Democrat Senators and Representatives knew what was going, yet the whole mess seemed to just “poof” and go away. Smells to high heaven to me.

  • Mike

    TARP was created not only to stop the lending freeze, but to allow banks to help refinance the ARMs that people are losing their homes over. I have a friend who until TARP was approved, his bank was about to simply lower its interest rate for two years while the financial situation of our economy settled. He bought his house five years ago. His ARM had readjusted and his house payment went up 700 dollars per month. His home value dropped by over 80,000 dollars in 2007-2008. He cannot refinance now, because his home will not be approved for the amount he owes. The bank was going to work with him, because they simply don’t want anymore real estate, (empy houses), but now with the approval of TARP, they are giving him three months to get out. Who cares if it helps the banks and screws the little guys? This is what happened in the Great Deppression.

  • Blaze

    It seems to me that any time the government puts their fingers in the pot they always ruin the stew. They forced the issue of making loans to people who can’t pay them back and now the banking institutions are in trouble. They forced the auto industry to build cars that nobody wants to buy and forcing cafe standards at every wim and now the auto industry is hanging by a thread. Between the government taxes, unions and the EPA we don’t have the textile companies in this country. As far as goods go, I’d like to find one product sold in America that was actually made in America.

    The government is now imposing standards on the American people because of global warming. Maybe the government didn’t get the memo but a lot of us are freezing our butts off. Global Warming is nothing more than a bad joke! The government in it’s great wisdom wants to tax ranchers for cow, pig, and goat farts all in the name of Global Warming!

    The government wants to regulate the health care system parsing out services and I can only guess where that is going. Where will the patients from other countries go for the best medical care now?

    We are in a big mess but the solution is so simple and it would not cost the tax payers a dime. All they needed to do was to eliminate the capital gains tax for two years and this country of ours would be back to normal.

    We are in big trouble now. The government will soon be telling “We the People” what we can and can not eat, drink, watch television, or listen to radio programs that we want to hear.

    Welcome to the New USSR of America!

  • Jeff

    I don’t see what’s so different in the federal government giving out money to every hand held out, and the banks loaning money out with the money that the federal government gave them when they had their hands held out.

    At least the banks and CEO’S of big companies were allowed to plea their case before Washington.

    I haven’t yet seen one citizen of the U.S of A. on C-span before Washington allowed to plea his case to how our elected officials screwed up and he now is loosing everything he has because of this.

    Instead of Washington taking our tax dollars and investing in banks that have screwed up, why not invest in the people that put them into office, and paid their taxes every year.

    They claim that it started in the housing market and ARM’s, (which I don’t believe), it would have been alot cheaper to have paid off the mortgages and the banks would have still recieved the money, and that would have freed up more money from the working guy to stimulate the economy, than this crap they are trying to get us to believe.

    I have no respect for the banks in business right now, I keep thinking about when I got a refi on my 30 year mortgage in 2007, and went to a 15 year mortgage. The whole time thur the process of paper work with GMAC they continued right up til the end to try and get me to go with a ARM rate.

    It’s time to let someone else run the bank, just like everything else in this country, If you can’t make it, go into another line of business.


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