President Obama To Require Banks To Lend - More Toxic Medicine
I thought I would take this opportunity to rain on our Treasury Secretary's parade as he prepares to announce a plan to solve the world's problems. Mostly because any announced plan is going to be driven substantially by lobbyists and special interests regardless of political rhetoric to limit their involvement in government. In other words, I never watch a politician's lips regardless of how charming they appear to be. Instead I watch their feet. The reality is we have yet to see anyone walk the talk. Anything that does not quickly restore full transparency into the banking system is talking to the hand.
Unfortunately, this environment becomes even more bizarre as time passes. Any mandate for banks to lend in return for government aid borders on frightening. Does a politician really understand anything about risk management? Federal government mandates to the states are a major reason why eleven states have so far drafted State's Rights legislation directed to Federal government abuse. In other words, mandates have extremely negative consequences. I'd like to see the fiscal impact of Federal government unfunded mandates on state and local government. In other words, how many of the fiscal crises at the state and local government level have to do with Federal government edicts without any funding to support them? (Let's digress for a minute here. In American history State's Rights has been manipulated for racism, bigotry, segregation and other abhorrent human rights crimes by special interests and small-minded politicians. In fact, in recent times State's Rights have often been secret code for racism and hatred. The original intent of State's Rights was actually quite elegant and pure. In fact, State's Rights has been used as an economic bulwark in our history as appears to be gaining ground today. I feel compelled to make this clarification because I consider any type of 'ism' be it communism, socialism, racism or even the corporate socialism of the last few decades to be the greatest of crimes against humanity with no exception.)
Anyhow, another mandate in the form of forced lending is not what this economy needs. We've already seen another contributor to the scope of this crisis is government leaning on banks to make loans that never should have been made - effectively a government mandate on some level. So, now as a solution to this environment big brother is going to force banks, already insolvent due to management incompetence, to lend with government backing. That said, credit-worthy clients with a sound business plan and strong finances should not be denied some appropriate level of credit to invest in the underlying economy.
The reality is banks and government are likely building an even larger crisis in our economy. A perfect example is the real estate situation that every politician is focused on making worse. I recently had lunch with a gentleman who owns a real estate and title business. He told me that bank lending standards have improved only marginally since this crisis hit. And, the talk of banks now requiring 20% down is generally a myth. Additionally, we see that the government just overdosed on the Stupid Pill - the timeless narcotic of choice for politicians. What this means is the government is encouraging banks to lend with marginal improvements over the lending standards employed in the creation of the housing bubble. Now tell me again why it would be different this time around? It won't be. For God's sake, are politicians capable of learning anything or did they lose that gene on their journey to Washington? What this will do is reinforce the recursive outcomes we have so often talked about in the various posts re 'The Game'. And, do so for years to come thus making this crisis even worse.
My point to this is if the government approves a bank bailout plan and requires the banks to loan, we are employing an extremely risky scheme. Government is continuing to shift the burden of risk onto its balance sheet with more and more bad bets. While the government's balance sheet is theoretically limitless, the practical implications make it substantially more constrained. I've hinted at implications of this for some time in numerous posts but we'll wait a bit to expand upon this discussion. Unfortunately we have plenty of time. I just have other topics to post on here in the interim.
Let's close with one critical point seemingly lost in translation. We have written on here that much of any borrowing in this environment is to survive until a recovery develops. In other words, extending credit in this environment involves substantially higher risks. Especially since we have discussed that the economy is not going to recover to potential without a substantial repudiation of current economic mythology taught at our finest institutions of learning.
I actually support extending credit as it pertains to a well thought out policy by the Federal Reserve - something that has not developed the way I would had hoped. This conduit by the Fed would keep credit available for proper government and private business actions to take effect. You can fuggedabout that.
The problem is to date we have seen no signs of any appropriate policy actions from any President or any member of Congress or business. And, I see none on the horizon. So, the extension of credit as Obama is going to mandate, means that the vast majority of lending simply deteriorates the balance sheet of American business, citizens and government. In other words, while we have been talking for the last two months that an environment is building for a possible rally starting in the first few months of 2009, it reflects no long-term improvement in underlying fundamentals. In fact, with these types of policy decisions, there is every reason to believe fundamentals will continue to deteriorate.
Unfortunately, this environment becomes even more bizarre as time passes. Any mandate for banks to lend in return for government aid borders on frightening. Does a politician really understand anything about risk management? Federal government mandates to the states are a major reason why eleven states have so far drafted State's Rights legislation directed to Federal government abuse. In other words, mandates have extremely negative consequences. I'd like to see the fiscal impact of Federal government unfunded mandates on state and local government. In other words, how many of the fiscal crises at the state and local government level have to do with Federal government edicts without any funding to support them? (Let's digress for a minute here. In American history State's Rights has been manipulated for racism, bigotry, segregation and other abhorrent human rights crimes by special interests and small-minded politicians. In fact, in recent times State's Rights have often been secret code for racism and hatred. The original intent of State's Rights was actually quite elegant and pure. In fact, State's Rights has been used as an economic bulwark in our history as appears to be gaining ground today. I feel compelled to make this clarification because I consider any type of 'ism' be it communism, socialism, racism or even the corporate socialism of the last few decades to be the greatest of crimes against humanity with no exception.)
Anyhow, another mandate in the form of forced lending is not what this economy needs. We've already seen another contributor to the scope of this crisis is government leaning on banks to make loans that never should have been made - effectively a government mandate on some level. So, now as a solution to this environment big brother is going to force banks, already insolvent due to management incompetence, to lend with government backing. That said, credit-worthy clients with a sound business plan and strong finances should not be denied some appropriate level of credit to invest in the underlying economy.
The reality is banks and government are likely building an even larger crisis in our economy. A perfect example is the real estate situation that every politician is focused on making worse. I recently had lunch with a gentleman who owns a real estate and title business. He told me that bank lending standards have improved only marginally since this crisis hit. And, the talk of banks now requiring 20% down is generally a myth. Additionally, we see that the government just overdosed on the Stupid Pill - the timeless narcotic of choice for politicians. What this means is the government is encouraging banks to lend with marginal improvements over the lending standards employed in the creation of the housing bubble. Now tell me again why it would be different this time around? It won't be. For God's sake, are politicians capable of learning anything or did they lose that gene on their journey to Washington? What this will do is reinforce the recursive outcomes we have so often talked about in the various posts re 'The Game'. And, do so for years to come thus making this crisis even worse.
My point to this is if the government approves a bank bailout plan and requires the banks to loan, we are employing an extremely risky scheme. Government is continuing to shift the burden of risk onto its balance sheet with more and more bad bets. While the government's balance sheet is theoretically limitless, the practical implications make it substantially more constrained. I've hinted at implications of this for some time in numerous posts but we'll wait a bit to expand upon this discussion. Unfortunately we have plenty of time. I just have other topics to post on here in the interim.
Let's close with one critical point seemingly lost in translation. We have written on here that much of any borrowing in this environment is to survive until a recovery develops. In other words, extending credit in this environment involves substantially higher risks. Especially since we have discussed that the economy is not going to recover to potential without a substantial repudiation of current economic mythology taught at our finest institutions of learning.
I actually support extending credit as it pertains to a well thought out policy by the Federal Reserve - something that has not developed the way I would had hoped. This conduit by the Fed would keep credit available for proper government and private business actions to take effect. You can fuggedabout that.
The problem is to date we have seen no signs of any appropriate policy actions from any President or any member of Congress or business. And, I see none on the horizon. So, the extension of credit as Obama is going to mandate, means that the vast majority of lending simply deteriorates the balance sheet of American business, citizens and government. In other words, while we have been talking for the last two months that an environment is building for a possible rally starting in the first few months of 2009, it reflects no long-term improvement in underlying fundamentals. In fact, with these types of policy decisions, there is every reason to believe fundamentals will continue to deteriorate.
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