Tuesday, December 15, 2009

The Political Aftermath of Bailouts

The Obama administration is again pressing banks to increase lending, explicitly sugesting that banks "owe" the country because of the bailouts.  Chief administration economist Larry Summers, for example, said Sunday:

“We were there for them and the banks need to do everything they can to be sure they’re there for customers across this country,” Summers said in an interview on ABC’s “This Week” program.
Similarly,

President Obama pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others.
This kind of jaw-boning, with its implicit threats, is one crucial negative of the bailouts, and it will contaminate policy for a long time. 

It is true that the banks benefited from taxpayer largesse.  But they presumably have a reason now for their limited lending: they do not see profitable lending opportunities.  If the administration bludgeons them into increasing credit, the banks will end up making bad loans that ultimately fail, creating yet another excuse for bailouts.

We made one huge mistake: the bailout.  We should not compound it with another mistake: interfering with private lending decisions.   Instead, we must lest the recovery take its course.  And we should recognize that one reason for the slow recovery is private sector concern about incessant government meddling.

15 comments:

Justin Kraus said...

Given that the bailouts were politically inevitable, Obama pressing the banks to loan more is predictable and probably justifiable.

With that said I agree that the bailouts were a "huge mistake." But we can't turn back the clock. We have to deal with reality and I am not sure that, given the existence of the bailouts, the next appropriate move is to proceed as if that history didn't exist. We did bail them out, they did take the money, so they do "owe" us. Which means that pressuring them to lend, again given the circumstances, is not unreasonable.

I am very sympathetic to the libertarian perspective on this issue and many others. However what is generally missing from your posts are practical prescriptions on how we can move gradually from the mess we are in to being capable of following the guidance that Libertarianism provides. Saying that we shouldn't have given the bailouts is fine (I agree) but you had to be willfully naive to think they weren't going to happen. Same goes with pulling out of Afghanistan, or legalizing drugs, etc.
There is a difference between persuasive and constructive criticism and yours generally fits into the former rather than the later category.

Anonymous said...

Justin, you say the banks "owe" us.
Would making imprudent lending decisions be the best form of repayment in your opinion?
Regardless of whether the government has already meddled - having government bureaucrats intimidating banks into making (riskier) lending decisions is never a good idea.
Does anyone remember why we are even here to begin with?

Justin Kraus said...

Anonymous,

To answer your question, probably not. But this is part of my point, give me/Obama an alternative besides doing nothing, because just as giving the bailouts were politically inevitably so is Obama's current "need" to look tough on the banks (precisely because he gave the bailouts).
Of course it would have been better if we had never gotten ourselves into this mess in the first place, but here we are, so lets have some constructive criticism on how we can realistically move forward.

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