2/21/2009

Treasury Finds No Rise in Bank Lending

This article, titled "Treasury Finds No Rise in Bank Lending", quotes the Treasury Department of saying that the largest recipients of the $700 billion stimulus plan did not increase lending to consumers in the last three months of 2008. Actually the lending in the last quarter of 2008 was stagnant or declining, even with the "$250 billion capital-injection program" in place to stimulate lending. As was talked about in class, these banks that are receiving the funds from the TARP program are for the most part keeping them to make their own books look good rather than lending the funds out to stimulate the economy as was originally intended. This hoarding problem has Congress pressuring the Treasury Department to find out what is going on with the funds given to banks. If the banks are using taxpayer dollars to make themselves look good, instead of loaning the funds out, the stimulus plan is, for the most part, ineffective. What are some possible solutions to this problem? The Government could put in place a contract with the banks to require them to lend out a certain percentage of the funds within a specified period. Another solution could be increase incentives (such as low interest rates) for potential home buyers to take out mortgages. In any case, the bank side of the stimulus plan is not working so far, so the Treasury Department and those in charge of this section of the plan must step back and re-evaluate their strategy.

6 comments:

Dr. Tufte said...

I think students need to learn to be very careful about the interpretation of pieces like this.

When I first mentioned that I wanted to major in economics, a much older friend told me it was "common sense made difficult". Think about that when reading stuff like this.

Here's 2 points to take away and form your own opinion:

1) If part of the problem in the early development of this recession was lending standards that were too liberal, how is more lending going to help?
2) If we're in a recession, plausibly the plans of potential borrowers will look worse on paper. If so, wouldn't you expect lending to go down, not up?

carson said...

Over the past few weeks banks have come under greater scrutiny by the federal government in what are now being called "stress tests." These tests are an attempt to see how much more the largests banks may require in additional lending to keep them going if the crisis worsens. It is possible, and probable, that the banks just haven't been as honest as they needed to be about their debt. As time passes bad assets continue to devalue and borrowers can't magically improve their credit scores to secure loans under the new standards. So what came first the chicken or the egg? Banks aren't going to relax their qualifications for lending and borrowers can't improve their position with banks if they don't have the money (if their jobs can't make payroll) to pay back loans. President Obama is hoping that his stimulus plan in addition to grerater regulation of banks will overcome this dilemma.

Dr. Tufte said...

I think you've really nailed the problem with recessions here.

When I talk about coordination problems in class, this is exactly the chicken and egg problem.

Truth be told, macroeconomists do not have a good understanding of how to address these coordination failures.

What we do know is that there is a role for the government here.

Our theory of coordination failures is that there is more than one equilibrium. These are true equilibria (so there is no irrational or sub-optimal behavior involved). But, there is a better equilibrium and a worse one.

Coordination problems arise when we get stuck at the worse equilibrium. The question is how to move from it to the better equilibrium.

This is where the government could come in as a disinterested party to push the interested parties in a direction that would benefit both (if only they knew for sure that the other party would do the same).

In practice, this isn't easy.

We do see some awareness of this in the stimulus package. Policies to help lenders improve their solvency, and other policies to help potential borrowers repay their loans are concerted attempts to address coordination problems.

This is all great. Really. This is what should be done.

But ... it does give you a filter for thinking about other aspects of the stimulus package. If you can't identify the coordination problem that they are trying to solve with a particular policy, what is their motivation for doing it?

anthony said...

Perhaps the government itself should lend money? That way we'll avoid the financial institutions hoarding it. The government already (sort of) does this with SBA loans, maybe they should do it with mortgage/private loans as well.

Liam said...

So it seems as if the lenders should stop worrying about lending. They would have a profound success by taking the government loans and making paper mache boats with the "Benjamins". They could hire a small crew to maintain the craft, while charging patrons $5 to ride on the money boats and travel through the tunnel of love. What just happened? Did i just solve a liquidity trap?

Landon said...

To go along with what carson was saying. If you have no one to lend to, then what are the banks to do? With so many people defaulting on loans, their credit scores are being drug thru the mud. With banks using credit scores as a major factor in the loaning process it is giving people no ground to stand on when looking to borrow.

If we are going to force banks to give a percentage of loans each month we would only be forcing them to give bad loans. If in a month you had 100 people looking for loans and only 2 of them have enough income and substantial credit, then the bank would give the 2 people loans; however, what if the bank had to loan 10% of applicants loans in that period. Then the bank would be forced to give out 8 possible bad loans to meet a quote. This would just be forcing a failure in the loaning process.