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Why Banks Are Unlikely to Jump Start Lending (and Smart Not To)

Posted on October 25, 2009

The current plea by government officials for banks to increase lending, will likely fall on deaf ears, since it is diametrically opposed to the government’s other policy of subsidizing these banks with enormous gifts of risk-free profits.

Two Contradictory Measures: Government Subsidized Profits for Private Banks and a Call for Lending
On the hand, the Treasury/Fed want to continue to hide bank losses and avoid a much needed restructuring of the banking industry. Instead the aim is to recapitalize the banking system, and maintain the status quo, by ensuring guaranteed risk-free profits to banks via via zero interest rates policies, subsidies, and other money-printing schemes.

Nevertheless, at the same time as the Fed implements the above guaranteed profit scheme for banks, the government wants the same banks to increase lending to businesses in order to revive the production economy. We can’t have it both ways.

Lending is a Difficult Way to Make Money, Playing the Fed Shell Game is Much Easier
But, if I’m a bank, why would I want to make money by lending money, if I can make it by taking risk-free capital from the government? Lending is a terribly tedious way to generate profits. It requires alot of legwork and due diligence, and is quite risky given the state of the production economy. Basically, it’s a pain in the butt. The alternative to lending, of course, is to participate in the Fed’s shell game, whereby banks borrow from the government at zero percent, and then lend the same money back to the government at 4%. There is obviously no contest. If I’m a bank, and I want to generate profits, I’m not going to lend out money. I’m going to simply play the Fed shell game.

Either We Eliminate the Banking Subsidies or the Banks Should Be Taken Over by the Government
So in essence, the current financial system remains a contradiction. We can’t have non-government owned banks subsidized by the government to guarantee enormous profits, and yet at the same time ask these subsidized banks to increase lending.

Obviously, if we want to increase lending, we need to either remove from the system the option of risk-free profits for banks and let them try to make money the old fashioned, by lending it. Alternatively, we can keep the risk-free, money-printing option, and in that case the government should take over the banks and lend directly to businesses, to ensure satisfactory credit flow to the economy.

A Two-Tiered Banking System Makes the Most Sense
Ironically, it makes no sense why we need banks to be middleman in the extension of simple credit in our economy, in the first place. There is really no value add service provided by non-government banks for basic lending products, such as mortgages. These banks simply skim off huge amounts of capital from the system as middleman, and create enormous economic problems by inventing complicated financial products in an attempt to make simple bank products, like mortgages, more profitable.

Essentially, there is nothing all that complicated about extending simple credit, such a loan to buy a house. Surely the same people who deliver our mail reliably every day, could also click the mouse a few times, to run some program that checks credit scores, analyzes tax filings, and then approves or denies a loan.

Interestingly, the trillions of dollars that have been used to bail out the current banking cartel, could have already been used to create an entirely new banking system, whose sole purpose, via a government fiat, would be to extend credit for transactions that are essential to the functioning of our economy. As for more complicated credit products, privately-owned banks can take up this business, but without any government guarantees or subsidies.

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