“Enlightened statesmen will not always be at the helm.” –James Madison
Finance: The White House thinks it can jawbone banks into lending to people they don’t want to lend to. We’ve been down this road before, and it led all the way to the 2007 financial meltdown.
The president on Monday gave a tongue-lashing to the “fat-cat bankers on Wall Street,” as he called them the day before. He wants them to make more loans to small businesses and consumers to give the economy a boost.
But should banks be lending just because a politician tells them to? We tried this before. Indeed, it’s the very source of the financial and economic calamity of the past two years.
President Obama may think dressing down the top dogs at Goldman Sachs, JPMorgan Chase, Wells Fargo, Bank of America and others is good politics. But it’s demoralizing and will only lead to more bank write-offs, more bank failures and less lending.
Besides, as economist Thomas Sowell noted in a recent series in IBD, our current economic ills are largely due to just the kind of government meddling we now see in the financial markets.
In this, President Obama is treading the very same ground as President Clinton and President Bush in pushing banks to make risky loans they shouldn’t make. And it will have the same dire results.
For those who don’t remember, the federal government became more involved than ever in determining how banks make their loans — and to what customers — thanks to the creation of Fannie Mae and Freddie Mac out of the wreckage of the Great Depression.
They were followed by the Home Mortgage Disclosure Act of 1975, the Community Reinvestment Act of 1977, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
Go back to the 1970s and early 1990s you’ll see that, just as today, bankers were criticized heavily for their alleged racism and lack of concern for the poor. President after president lambasted them for not lending more to support presidential social policies.
By 2000, President Clinton’s HUD required half of Fannie Mae’s loan originations to go to poor and moderate-income borrowers — whether they could pay on the loans or not. It marked the triumph of leftist politics over financial common sense.
This is how the subprime meltdown, the source of our current financial troubles, came about. Not by “greedy” banks or by “deregulation.” Banks had a choice: make bad loans or face more scrutiny when it came time to raise capital or to merge with other banks.
As such, President Obama must know his attack on banks is dishonest. Plans for a new Consumer Financial Protection Agency, the $700 billion TARP bailout and the creation of a “pay czar” who determines the pay of the top officers at companies that took bailout funds, have created a timid, risk-averse financial sector.
Banks have nearly $1 trillion in reserves. So why don’t they lend them? Simply put, they can’t sneeze without government permission. Worse, they don’t know what taxes or regulations they’ll face in coming years. If the House’s vote on Friday to impose a $150 billion “fee” on Wall Street is any indicator, they can expect far lower profits and much more destructive government control — not less.