Bank Bailouts and the Loans Myth, Paul Kedrosky, Infectious Greed

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?”

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Why Banks Should Lend Out Treasury's Funds, Felix Salmon, Market Movers

Paul Kedrosky has a peculiar argument today, saying that banks shouldn't lend the money they're getting from Treasury:

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There are a couple of problems with this argument. The first is the idea that loans made now will have higher default rates than legacy loans: I can't for a minute see why that should be the case, given that everybody expects underwriting standards to have tighened up. But there's a big difference between tighter underwriting standards, on the one hand, and a credit freeze, on the other.

The bigger problem is that if the banks don't lend out this new money, the argument for bailing them out in the first place is severely weakened. The reason to bail out banks is that they're systemically important and that now more than ever they are crucial intermediaries who keep credit moving in the economy. (Now more than ever because the primary bond markets have completely seized up.)

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