Inkless Wells

Paul Wells on all the latest out of Ottawa—along with the occasional post about jazz. Follow Paul on Twitter: @InklessPW

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Are we like 1,000 per cent sure this is a good idea?

by Paul Wells on Monday, December 14, 2009 4:58pm - 57 Comments

New York Times:

WASHINGTON — 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.

Tags: uh oh

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http://intensedebate.com/people/Jack_Mitchell Jack Mitchell

This is exactly what the vague assurance market needs.

Canuckistanian

heh

http://intensedebate.com/people/s_c_f s_c_f

So nice to see the US moving to a command economy, we know how well that works. Obama = fail.

Canuckistanian

"command economy"

more like a "pretty-please with sugar on top" economy.

Mulletaur

George W. Bush nationalized the Yankee banks as a result of his own administration's economic incompetence, why wouldn't Obama want to pull the levers ? Anyway, what do you have against lending to small business ?

hosertohoosier

The issue isn't so much lending more money – it is lending more money in a time when credit is justifiably tight, to people that wouldn't otherwise qualify for loans.

The credit crisis was driven by a destructuve partnership between the right and the left. The left encouraged bad loans, and created the agencies that started the stampede. The right (and Jimmy Carter) deregulated securities and oversight provisions. Obama looks to be starting up the same old cycle.

http://intensedebate.com/people/jolyon jolyon

I don't think it is what America needs but it certainly is necessary for Dems because they have screwed the pooch this year and are going to pay for it next year if they don't get their act together quickly.

'Extraordinary' certainly sounds concerning but lending to small businesses is a good idea. Federal Govt is making loans to home buyers from what I understand but I am sure Americans would prefer banks to look after mortgages.

“I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.”

I wonder what Obama thinks he is doing when he takes a shot at 'fat cat bankers' one day and then they next is asking for favours from group he was condemning yesterday. And I also wonder if Obama's condemnation of 'fat cat bankers' includes Rahm Emanuel and Larry Summers both of whom did quite well for themselves on Wall St.

Orson Bean

Obama outraised McCain everywhere. Except maybe in KKK chapter houses.
http://intensedebate.com/people/madeyoulook madeyoulook

jwl, Obama was not asking for favours. He was telling private businesses what to do.

RayK

I'm sure as heck not. Yes, we don't want the whole credit market to seize up, but didn't we getting into this problem because US banks were lending out too much money to begin with?

tobyornottoby

No we got into this mess because banks didn't actually secure their loans with real property and/or seek return of their capital. Instead they created a ponzi like scheme in which shares in packages of bad loans were sold at artificially inflated prices aided by corrupt if not technically fraudulent accounting.

Lending more money than some consumers could afford was just the front end of the conspiracy.

burlivespipe

Maybe you should have a word with Jimmy Flaherty, then.
Brian

How is it a command economy for the President to ask banks to lend more?

Hell, Hoover did that in late 1929.

Saying that's "a command economy" is like saying that Canada keeps too close an eye on its young offenders. ;-)

Canuckistanian

it isn't a command economy so much as a 'captured' gov't. why lend when the gov't will just give you trillions of dollars of free money?

http://intensedebate.com/people/JSRobinson JSRobinson

Of course, this is one of those hilarious policies where the President's economic council will tell the nation that they have to solve the economic downturn caused by sub-prime lending with sub-prime lending.

Could it be that Obama has so few convictions that he is a near-perfect opportunist?
Orson Bean

This is yet another symptom of this general disease we have in the West these days — the belief that we have the present ability to make our lives perfect, if only we came up with the right policy solution. Thus the equally daft belief that we somehow have the ability to avoid economic downturns and/or the ability to make economic downturns virtually painless. Don't get me wrong, we certainly can and should do certain things, but cranking up loans to subprime/dodgy borrowers ain't one of them. And what is going on with mortgage rates in this country right now is utter madness. All we have done is put off the pain until later.

http://intensedebate.com/people/TJCook TJCook

Yeah, if there's one thing the last 12 months have proven, it's that *regulation* is the problem.

Wait – what regulation was responsible for the banks/non-banks' insanely risky behaviour?

Orson Bean

I'm not really, or necessarily, talking about regulation here. E.g., a central bank keeping rates at microscopic levels is not regulation. That's a policy. There are lots of levers that government has, and things that it can do, that don't involve regulation or the imposition of regulations. But it's still government action.

I'm aware that there's a huge — and, unfortunately, often highly polarized — debate down in the US as to who's "responsible" for the subprime mess. And that some right-wingers blame the Clinton Administration for certain policies that were apparently put in place to encourage lending to low-income individuals. Meanwhile, some left-wingers blame a free market gone mad, lack of regulation, blah blah blah. But that debate was not really what I was getting at.

Mulletaur

"I'm aware that there's a huge — and, unfortunately, often highly polarized — debate down in the US as to who's "responsible" for the subprime mess."

Not really. Alan Greenspan is responsible, that much is very clear. He admitted this by recanting his laissez faire views during an inquisition by Congress.

Orson Bean

M, I happen to agree with your view on this generally (ie., that loose monetary policy is probably primarily to blame), but that's different from the question as to whether there's a spirited partisan debate going on down south as to who's ultimately responsible for subprime. There definitely is. There's also no question that some people who consider themselves liberal and left of centre in the U.S. have historically advocated in favour of vigorous and preferential lending to small businesses and individuals with less than stallar credit ratings.
Mulletaur

Agreed on some points, Bean. Congress was pushing for "vigorous and preferential lending to small businesses and individuals with less than stallar credit ratings", no question about that. But this came from both the right and the left. The idea on the right was to create a shareholding and property holding democracy. Rates of home ownership in the United States are very low compared to other developed countries including Canada and the United Kingdom. Some of this has to do with 'redlining' by mortgage companies of black and hispanic areas, which is for the most part out and out racism. That is why the left signed on for this. Dubya also pushed hard for increasing home ownership.

I totally agree with the goals. But I totally disagree with the means. Risk must be treated as real and compensated/priced accordingly. Treating sub-prime infested ABCP as if it were as solid as sovereign debt is total guano. Worse than anything, there was no secondary market for this turd – it was totally over the counter, with the result that the price mechanism could not work to adjust the value as appropriate. The whole sub-prime crisis is not so much a failure of capitalism as a typical example of the most disgusting and corrupt rent seeking behaviour by the high priests of U.S. capitalism.

The Yankees can fight among themselves as much as they like, both of the main political tendencies are to blame. But the whole thing could have been avoided if Greenspan had bothered to look into what was behind the asset price inflation he created with his low interest rate policy, which, after all, was designed to ensure that he didn't cause a recession and get blamed for the second term electoral defeat of a second Bush. Greenspan suited Dubya to the extent that he didn't screw him over with a tight monetary policy like he did Daddy Bush. The consequence was almost the collapse of the whole of the world economy. It wouldn't be the first time the Yankees would have been responsible for this.
http://intensedebate.com/people/canucklehead canucklehead

I have been fascinated all along by the theme of racism being the motive for the different rates of lending by the financial institutions. Greed and profit have always been, so I supposed, the total sum of wall street behavior – certainly in the view of it's liberal critics. It suprises me in the first place that all these Harvard and Yale graduates and members of the elite are suspected of, as you say, out and out racism. Are these CEO's and executives so racist that they felt that their racist principles came before making profits off of otherwise good risks in this area? It doesn't even jive in that sense because in the liberal view of the essential mechanism of capitalism racism towards certain groups should actually encourage the banks to "exploit" those groups to the greatest possible degree.

As always, I get hung up on the expectation of some kind of basic logical consistency. It's all a matter of impressions I guess.
Mulletaur

The phenomenon of redlining is well known in the United States and even legislated against. You're right, the market should be neutral to race, among other things. But it's not. And well educated people should be making rational decisions based on the profit motive alone when they are promoting their shareholders' interests. But they don't.

Also, rental is a greater form of exploitation than ownership. It is not for nothing that Keynes called for the 'euthanasia of the rentier'; although he was referring to a slightly different kind of rentier, the philosophical basis is the same.
http://intensedebate.com/people/canucklehead canucklehead

It might be stubborn of me, but I'm not very convinced by the wiki article. There's only one mention of a study that found that rates of lending to minority groups was ever different adjusting for the disparate income levels in the first place. The rest of the article consists of saying 'this is what happened, which was because of racism'. Admittedly, one study probably should be enough, and it does soften my point of view even if the fact that something is legislated against is as likely to convince me it's an unfounded assumption than that it's definitely real.

It isn't hard for me to conceive of government programs having racial bias as parts of the wiki article talk about. The National Recovery Act of the New Deal was nicknamed the "Negro Runaround Act" and the first minimum wage legislation back then was supported by one senator who explicitly argued it was needed so white workers were not undercut by blacks for lower wages. Before the minimum wage there was less unemployment among black Americans than white.
Orson Bean

M, I'm totally surprised to hear that rates of home ownership in the US are low compared to, e.g., Canada and the UK. I would have assumed just the opposite, especially with the plethora of fly-by-night banks and other lending institutions down there, and especially given the fact that, unlike in Canada, mortgage interest is tax deductible there. I've always understood that to be a huge incentive towards home ownership in the US.
Mulletaur

Actually, I am totally wrong about rates compared to the United Kingdom and Canada, according to the stats quoted on Wikipedia – rates are roughly the same, in the mid to high 60's. My mistaken impression comes from the rates of Hispanic and African American ownership, which are much lower – 48-50%.

Just imagine what the rate of home ownership would be in Canada if mortgage interest were tax deductible here.

Canuckistanian

"I'm aware that there's a huge — and, unfortunately, often highly polarized — debate down in the US as to who's "responsible" for the subprime mess."

kinda like the 'debate' between evolution and creationism; climate change and the global socialist conspiracy; rational regulatory regimes and the miracle of the free market; between reality and fantasy.

http://intensedebate.com/people/canucklehead canucklehead

You haven't heard anything at all about pressure and requirements to make loans to designated "underserved" groups? ACORN made a hobby out of pressuring bank executives about mortgatges to the point and beyond the point of intimidation.
http://intensedebate.com/people/madeyoulook madeyoulook

Was it regulation per se, or was it good ol' fashioned political arm-twisting by congressmen browbeating lenders to take on insanely stupidly dangerous credit risks (see Frank, Barney and Mac, Freddie etc.). Which, come to think of it, sounds oh so eerily similar to Paul's snippet above.

http://intensedebate.com/people/canucklehead canucklehead

I don't know… theoretically I suppose there's not much difference between one way or another government influences a market. I think the main government mover was Fannie/Freddie which are kind of hard to describe. For sure not regulation – sort of psuedo government agencies. Ironically, I hear Bush or some of his administration wanted more regulation of mortgages, esp. Fannie and Freddie, but they didn't really push much for it.

Isn't it kind of great that Barney Frank is still around and actually is requesting Fannie and Freddie to not tighten up their condo loaning rules by as much as they recently announced? http://www.reuters.com/article/idUSTRE55L39120090…

http://intensedebate.com/people/madeyoulook madeyoulook

Great? How much catastrophe do you want to dump on our largest trading partner and the only current superpower (nominally) in support of individual freedom?
http://intensedebate.com/people/canucklehead canucklehead

Well great like explode your head, furrow your brow kind of great. I honestly wonder if he ever considered resigning.

http://intensedebate.com/people/canucklehead canucklehead

This is really true.

http://intensedebate.com/people/TJCook TJCook

Isn't the world funny – all Bush had to do was check his "gut" and the invasion of two foreign nations was A-OK, along with the tanking of the nation's balance sheet and his assault on civil rights.

Obama, on the other hand, has to be, like, 1000% certain before giving vague policy speeches.

Weird, innit?

TedTylerEzro

So are you saying that Obama should be more like Bush?
burlivespipe

You know which one Harper wants to follow, doncha?

Logician

Right, they can just bundle them up together, call them something catchy like asset-backed commercial paper, and get them their well-deserved Triple A rating. It's foolproof.

Mulletaur

Exactly.

Lord Kitchener's Own

BTW, did you see that Coyne vs. Wells made the iTunes list of best podcasts of 2009?

Sweet.

http://www.macleans.ca Jonathan McKinnell

Woah Nelly! I did not know this! Fantastic! Thanks for pointing this out.

Emmett

It'll be alright, so long as the lending banks get other, larger banks to take on all their loans…
Jesse

Bush didn't nationalize a thing. He had the treasury flood the balance sheets of bad banks so they would remain solvent.

Then, as the business cycle returns to normal the plan was for the banks to return the money (which they are).

Telling banks how to run their business is a completely different thing. And the compalint about lending to small business is that its incredibly risky. The banks just became independently solvent – lets not have them throw money everywhere and need help again.

http://intensedebate.com/people/JSRobinson JSRobinson

Bush did worse than "nationalize" the banks. He made the public take on all the risks of people's private investment in them, and then Obama did the same thing with GM (as did Harper and McGuinty in Canada). The only ways to stop these cycles would be for government to either stop taking shares in businesses and let them sink or swim (while keeping the banks regulated to prevent economic meltdowns) or for government to actually nationalize these institutions when they bail them out. Governments refuse to do either because of the political costs, so our youth are now going to spend years paying off the pensions of GM workers.
Mulletaur

Nice try, proxyboy. Your good buddy s_c_f still didn't answer my question: what do you Conservatives have against lending to small business ?

http://intensedebate.com/people/madeyoulook madeyoulook

Banks lending to small business should be in the two entities' mutual interest, with proper due diligence and risk assessment. Obama throwing his weight around like this is almost certain to make a bigger mess of things.

Mulletaur

"Banks lending to small business should be in the two entities' mutual interest, with proper due diligence and risk assessment."

Absolutely right. Also, completely consistent with what Obama is saying.

http://intensedebate.com/people/s_c_f s_c_f

That's not what he's saying. He's saying screw the diligence, lend to people because I say so. When I say so. If you don't do it I'll make you.
Mulletaur

"He's saying screw the diligence, lend to people because I say so, when I say so. If you don't do it I'll make you."

No, he isn't. As usual, you're making sh1t up. You still haven't answered the question : what do you Conservatives have against lending to small business ? You're perfectly happy to spend taxpayers' funds to bail out big banks, big car companies and now big oil, but you won't lift a finger to help small business. Why ? They are efficient at creating both wealth and jobs. You need to answer the question.
http://intensedebate.com/people/madeyoulook madeyoulook

Nope. Because you don't need the President of the United States to tell bank CEOs how to make a buck. You need the President of the United States to arm-twist bank CEOs to act against the bank's and the shareholders' interests.
Mulletaur

Ha ha ha, shareholders' interests, how funny. Was it in the shareholders' interest to treat illiquid ABCP filled with sub-prime mortgages as if it were government bonds ? Was it prudent ? Just askin'.

On that score, Obama may as well nationalize the U.S. economy and pull the levers. He couldn't do a worse job than the smoking monkeys who pretend to defend shareholders' interests.
http://intensedebate.com/people/madeyoulook madeyoulook

Right. And Obama was merely encouraging these CEOs to just do their job, eh?

It seems like you need to learn just how much government arm-twisting can screw up a banking industry. Try Barney Frank pushing for Fannie & Freddie to expose themselves to dumb credit risks. Try the federal government making Bank of America "an offer he can't refuse" in swallowing up Merrill Lynch, in secret with no disclosure to current and prospective shareholders of the forced attempted suicide of shareholder value about to take place. Try Obama oh-so-gently nudging present-day banks to follow in Fannie & Freddie oh-so-glorious footsteps.
Mulletaur

"It seems like you need to learn just how much government arm-twisting can screw up a banking industry."

The banking industry screwed up the banking industry all on its lonesome without any help from the government. That is what Greenspan's Auto de fé before Congress was all about.

Lord Kitchener's Own

I know how we can get money flowing to small business owners and homeowners – the banks ought to give out loans at an interest rate level below prime. That will make borrowing the money much more attractive.

TedTylerEzro

Out of curiosity, has sub-prime lending been made illegal? Or is it merely that you have limits on how quickly you can raise the interest rate, or that you have to ensure that the borrower has the means to pay it back?
http://intensedebate.com/people/madeyoulook madeyoulook

Wait! Wait! I've got it! Why don't we pay small businesses to accept the bankers' money!

http://intensedebate.com/people/Thwim Thwim

Hey, if it works for the gov't…
Canuckistanian

we need teddy roosevelt…cause we know obama ain't gonna take on the banksters that make up his administration.