As Government Officials Press Banks to Lend, What (if Anything) Are They Thinking? (Bob Higgs)

Bob Higgs on the state telling banks to lend while giving them extraordinary incentive not to:

Message from the president to the banks: lend! This message was made perfectly clear by White House press secretary Dana Perino, who said: “What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money.” Just in case the bankers might fail to get the emperor’s hint, Perino added ominously that the bank regulators “will be watching very closely.”

Anthony Ryan, acting undersecretary for domestic finance at the Treasury, told those attending the annual meeting of the Securities Industry and Financial Markets Association: “As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy.” Like Perino, he felt the need to add a thinly veiled threat: “It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.”

So much for the idea that because the government is taking nonvoting preferred shares in exchange for its handouts, it will have no influence over how the privileged banks are managed. Indeed, the idea that it would keep its hands off was always preposterous, regardless of the formal status of its newly acquired ownership stake. In view of the many ways in which the government can hurt a bank whenever it wishes to do so, no ownership position was necessary in any event.

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