Forcing banks to lend couldn't be a more intellectually bankrupt idea. The business of commercial banks is to lend money when the risk-adjusted returns exceed its cost of capital. Just lend money, because we said so? We've seen this movie before - it's called Fannie Mae and Freddie Mac - and it doesn't end well. The right way to approach the problem is to create truly healthy banks, either out of currently sick institutions or de novo, and to let them make rational lending decisions. If the Government sees a particular constituency that requires funding, don't force a bank to do it if it doesn't make economic sense. Either create a discrete program or use tax incentives to generate the necessary resources. The worst possible outcome of TARP is to create another generation of sick institutions by forcing them to make irrational loans to satisfy the moral (or public relations) objectives of our Government representatives. Obama needs to fight this urge with a vengance.
While I respectfully disagree with his statement about Fannie and Freddie, I agree wholeheartedly with everything else stated. You can't force banks to lend. Doing so will only lead to a host of other new problems.
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The funny thing here is the number of people that claim that the Community reinvestment act "made" banks lend to poor, inner city folks, who were a bad risk. That is bullocks, as this recent spat has shown, you can not make banks lend if it's not profitable to do so. They opened up their doors because doing so was very lucrative and profitable.
Eric is absolutely right. While the Act did make banks give sub-prime loans, it didn't make them do it at prime rates or make S&P rate their paper as AAA. The banks made a lot of money on those risk-adjusted rates until their greed (not the law) made them grant lower and lower rates to drim up more business at any cost (risk passed on to the mortgage buyers).
As we've seen from your charts and graphs Bondad if those Alt-A and option loans aren't renegotiated in the near future then the second round of defaults will begin. The first round of subprimes will look like a picnic compared to the damage that will be done by the second.
The guy doesn't seem to understand the difference between the primary and secondary mortgage markets.
I agree with what he says right up until he opens his mouth.
--Charles of MercuryRising
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