Government Meddling with Banks

The Obama administration is attempting to get banks to make loans to consumers and industry. It’s not working as intended on two fronts.

Banks appear to continue to hold back where risks look great in an uncertain economy. In its widely publicized effort to “clean up the books” of so-called “toxic waste,” the government has made bank executives gun shy. A hesitant bank executive does not tend to make risky loans.

The government helps this timidity along by making the spread of government investments (cost of borrowing from the government and return from investing in government bonds) a sure thing. So why should bankers make risky loans?

Yet loans to consumers and business are the recipe, the stimulus, the means, of getting us out of the deep recession.

Secondly, consumers have to want to spend and borrow, and business should want to expand and thus borrow. They have not been doing this as much as they would in a flourishing economy. Fear of government-imposed uncertainties and future taxation are the culprits.