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.