Will it Never Lend?
The recent bailout package passed by Congress, the Troubled Assets Recovery Program (TARP), was meant to restore confidence in the financial system and get money back in to hands of those who need it. Congress meant for the capital injections provided to the banks by the Treasury to be used for lending while these banks untangled toxic assets that were affecting their ability to gauge their own worth.
However, banks have not been lending and instead have been focusing much of their time on mergers and acquisitions. One New York Times article quotes an executive from JPMorgan Chase saying, in regard to how they are spending their bailout money:
"What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling... I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."
And in regard to lending practices, the same executive said:
"We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side."
To put it differently, Chase won't be lending any time soon.
So, in as much as the bailout was intended to restore confidence to the financial system by injecting liquidity into the system, it has failed. Despite the drama and urgency of the federal bailout, banks are still acting very cautiously in terms of lending and are using taxpayers' money to acquire other banks.
However, if we cannot get the banks to lend by restoring confidence, there are other measures that can be taken. In Britain, the government has also injected capital into the banking system. But it has also mandated lending requirements in return for accepting government funds. Robert Reich, in a blog post entitled "Amend the Bailout of all Bailouts," says:
"Paulson's taxpayer-financed bailout continues to put money into the wrong pockets. So another item Congress should get to as soon as it returns: amend the Bailout of All Bailouts...to force big banks to loan out at least 50 percent of the amounts they receive in cash from the government."
But it seems that conservatives in the Treasury cannot get past their ideological reservations that are preventing them from demanding these conditions. Adhering to old free market dogmas, people like Paulson can't imagine distorting the market with government mandates even as they distort it with billions of dollars of federal funds. The most they have done so far is begged.
Some Democrats, having noted the problem, are taking a hard line. A story on thehill.com today quotes Representative Barney Frank (D-Mass.) as saying:
"I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the President's request to respond to the credit crisis by making funds available for increased lending..."
Frank has scheduled hearings for the weeks after the election on the federal rescue program in order to determine the flaws and get banks moving. Hopefully Democrats will be able to navigate around old idological dogmas and get banks lending.