Here We Go Again

Today's Wall Street Journal reports that 13 large banks, who have received about $148 billion in government bailout funds, reported a decline in loans outstanding in the fourth quarter.

Politicians and journalists have been raising a stink about the lack of lending by bank, complaining that TARP recipients should using the bailout funds to lend to "stimulate" the economy.

While I have written about this before, it is such an important issue it is worth repeating again and again. Banks need to make good, profitable loans. They have every incentive to do so. If they don't make a loan, it is because they don't believe it is a good risk. To force the banks to make loans they wouldn't otherwise is to say you are forcing banks to make risky, unprofitable loans.

And that's how we got into our current recession.

If you ask, why do the banks need or deserve TARP funds, the issue is not about bailing out shareholders (who have suffered staggering losses); nor is it about paying executive bonuses (many have foregone or greatly reduced them, which are already hurting organizations such as AIG and BoA as talent flees government-regulated entities); and nor is it about making acquisitions (although that is one way to ameliorate the credit crisis, as evidenced by government pressure to get M&A deals done such BoA's purchase of Merrill Lynch and JP Morgan's purchase of Bear Stearns).

Instead, the bailout is designed to protect creditors, which means all of us who have money in bank accounts - and more broadly, is designed to prevent money from fleeing banks and investing in Treasury bills/bonds or taking cash and literally putting it a mattress (which happened in the Great Depression).

And that is a financial collapse that could turn this recession into a depression.