The Feds Take Control of Lending

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This week's announcement that the federal government will invest in banks is a poorly disguised takeover of the lending polices of those banks. The government will not only limit executive compensation, which will eventually result in the best people finding better opportunities elsewhere, but it will eventually dictate lending practices, as it did with Fannie Mae and Freddie Mac years ago. Politicians will of course deny it.

Interestingly enough, the Wall Street Journal recently reported that the lending arm that finances a bulk of buyers purchasing General Motors vehicles, GMAC, is taking a more conservative lending stance in financing, limiting purchase contracts to customers with credit scores of 700 and above. The median score of Americans is 720.

The above in mind, don't be surprised that when Americans possessing bad credit histories complain to politicians that they cannot get car loans, that the government will "softly" suggest to the lenders whose shares they own that they would do well to lend to people who are deeply in debt. Politicians will claim that no one can get to work without a car and no American can save money in tough economic times, so therefore they are saving America by requesting that car loans be made. Politicians forget that people, when left to their own devices, can easily join carpools.

Another point many forget is that governmental debt guarantees (seemingly made daily) are to some degree worthless. That is so because the government must print money if the guarantees are to be honored. The printing of more money will eventually lead to even higher rates of inflation that all Americans will suffer under. In short, the money that funds all manner of "compassionate" government programs must come from somewhere.

The banks the U.S. Treasury is placing money with will eventually be forced to finance all kinds of politically favored industries, all to save America. Freedom of our financial institutions to lend only to economically viable projects will be curtailed.

Recently we were told by the political class that businesses could not meet payroll, yet no significant increase in first-time unemployment claims occurred. Politicians claimed if they did not get their way a depression would ensue. They said commercial paper markets were frozen, yet the logical next step of mass layoffs never materialized.

In the 1970's this writer was issuing commercial paper for a company until "tight money" made cash for daily operations dear. The firm's commercial paper was backed by bank lines of credit and my company accessed those lines of credit when commercial paper was difficult to sell. Our lenders were very unhappy and told us as much, and the result was that we were forced to cut inventory and receivables in order to reduce the need for credit. Back then, companies either did what the banks wanted or risked bankruptcy. Then as now, banks did cut off businesses with poor credit histories.

Looked at in stock-market terms, the current decline is not just a panic by over-leveraged investors. While the latter has played a role, unspoken of is a liquidation of shares by intelligent investors who understand that centralized planning of bank-lending practices is on the way, and they're aware of the negative economic consequences that always reveal themselves when the power of governments grows.

The severe curtailment, or even destruction of capitalism in the United States has begun with many in the mainstream media happily repeating whatever the politicians claim. President Bush's assertion that we must interfere in free markets to save those same free markets is positively Orwellian.

Worse, look for further economy-enervating maneuvers by politicians, which will give the federal government even greater control over the most successful economic system the world has ever witnessed. And if politicians don't get their way as they seek to march us farther in the direction of serfdom, expect even more in the way of hysterical cries of Armaggeddon.

Unless voters elect people who will restore economic freedom so that those who make bad decisions go bankrupt and learn from their mistakes, the future for citizens of the United States will be one where the American dream of self-made success is mostly a thing of the past.

Mr. Dunn is the retired founder and president of Dunn Asset Management. He can be reached at
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