The Obama administration is planning to announce a new bank bailout program Monday. It would be nice to believe that they know what they are doing but I am finding it difficult. The plan is a convoluted way of giving public money to private banks. The morality of this aside it is unclear what it is supposed to accomplishing.
The current problem is not just that the banks are short of money it is that there is a lack of attractive loans to make. It is all too apparent that in the last few years a lot of imprudent loans were made. Unfortunately a lot of people and businesses came to expect and depend on the availability of these loans. However banks, even banks with plenty of money, are now properly reluctant to make such loans. So bank lending is not going to return to normal if the debased lending standards of recent years are taken as normal. This means a lot of unavoidable economic pain as the economy adjusts to realistic loan underwriting standards.
Another part of the current problem is lack of trust. In recent years fraud and corruption became pervasive. Loan applications were falsified, appraisals and bond ratings were corrupted. The resulting lack of trust impedes the smooth functioning of the financial markets as parties are reluctant to deal with each other for fear of being cheated.
Additionally there is a general lack of confidence. People are reluctant to lend or borrow unless they are confident about future prospects. However it is hard to be confident when the government leaders appear baffled about what is wrong and how to fix it.
It is hard for me to see how throwing more money at the banks is going to fix any of this.
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