Listening to the Sunday morning news shows and 60 Minutes yesterday, viewers were consistently led down a path of pure economic illogic. Even Carly Fiorina, the ex-CEO of HP and now constant conservative economic news commentator, laid blame on banks for not lending (in order to stop unemployment and falling corporate earnings). Each show started with how bad the economy was and then transitioned to all the help banks are getting from the Treasury. Each news program attempted to conclude that the solution was to get banks to lend. The logic clearly does not follow, as the last thing the taxpayer should really want is for banks that receive TARP capital to loosen lending standards and take on more risk.
The debate over whether the economy stimulates lending or lending stimulates the economy is a classic one and has yet to be resolved (since it was first raised after the Great Depression). One aspect of this debate that was lost on every Sunday news show anchor was the fact that in an economic crisis, loan demand drops, particularly for creditworthy borrowers. The reality is that in difficult times, it is harder to lend - even if banks wanted to do so. If you look back over past downturns, most loan demand comes from borrowers looking to refinance existing mortgages, revolving lines of credit and balloon financings. Yes, more credit would help those households and businesses that are already in tough financial straights, but these borrowers are now far from creditworthy. In addition, refinancing these borrowers would do very little to stimulate GDP and job creation. To best spur the economy, credit must be extended to consumers and businesses that are looking to expand. However, the point lost on the media is the fact that creditworthy borrowers that are looking to expand are tough to find in this economy. Few households really want to take on new car debt if they could lose their job in a month. Few businesses will expand given waning demand. Unfortunately, not one news show mentioned the risk of loosening credit underwriting or lower loan demand.
The American public does not want banks to loosen credit standards and provide more capital to the marketplace. Lower credit standards and loose capital are what got us to this negative business cycle to begin with. Further, if the American public wants more involvement from the Treasury forcing lending efforts (as Congress strongly suggested last week), it should consider the Japanese and South Korean experience. In both cases, investment programs directed government capital to needed sources. The problem came when those borrowers hadn't fully disclosed the extent of their balance sheet value and the injected government capital met with greater credit losses. The result was a misallocation of capital and a longer than needed downturn. This is why it makes us nervous when bankers and regulatory officials call for a "relaxing" of mark-to-market accounting. Instead of the Treasury demanding banks to lend more, they should require banks to more accurately mark their balance sheets to market, recognize the losses and then get out of the way. Only after the losses are ascertained and confidence is restored, will prudent businesses and consumers alike move to invest and consume once again.
Banks should be left alone to manage the newly injected TARP capital the most efficient way possible, without regulatory interference. Of course, this is just our opinion, since we weren't invited to the news shows.