There have been lots of suggestions for what the Obama Administration’s next move in getting the economy back on track should be. Some, like Paul Krugman, are pushing for another big stimulus plan. I’ve also seen proposals for WPA-style jobs programs.
There are also some who think that the best thing that the federal government could do for the economy is balance the budget. Others who think that doing nothing at all would be the most help.
I think that there is one important task to which President Obama’s economics team should devote all of their energies to the exclusion of everything else: getting the banks lending again. Consider the graph above. Clearly, bank lending in the United States has suffered in the last couple of years and is a primary cause of the slowdown in economic activity. While there is room for a healthy skepticism on the effectiveness of spending as fiscal stimulus I don’t know that anybody disputes bank lending as a means for helping an economy grow.
It has proved an elusive objective. TARPs I and II and the Geithner plan were all attempts at putting the banks back on a sound footing. None of the attempts worked and for a very good reason: the banks have behaved rationally. The preponderance of the toxic assets that started the whole snowball rolling remain on the banks’ books. The banks have reluctant to take any of the offers proffered to deal with them because to take any of them would be to acknowledge what lousy shape they’re in. The banks need to rebuild their capital.
To that end the Federal Reserve has been lending banks money at, essentially, an interest rate of 0 and the banks have been investing the money, much of it overseas, in the full confidence that the federal government will continue to bail them out and it’s less risky than making loans in the current uncertain economic climate.
None of the alternatives that present themselves are particularly appealing. Standing firm in a refusal to give the banks additional aid should they need it is unlikely in the extreme, too politically risky. Raising interest rates is more likely to slow the current level of growth than it is to induce the banks to lend.
Punishing the banks for investing rather than lending will not only be met with resistance (as the recent movements in the stock markets should suggest) but will only induce them to lend in the most indirect of manners. As long as they can make more money by investing than by lending, they’ll invest.
Assuaging the bankers’ worries about the prospects of future regulation or taxes might help a little but it would confirm the suspicions of some that the White House is more concerned with Wall Street than with Main Street and recent remarks from President Obama have been somewhat along the opposite lines.
The dilemma in which the White House finds itself now is a primary reason that I thought that the federal government should be viewing the big banks with an eye to liquidating them rather than trying to keep them afloat a year ago. Now a year has passed and the banks are doing much as they were a year ago only doing it without the air of panic that was so evidence last year.
BTW, the Senate may be poised to present the president with another defeat that hasn’t much been remarked upon. It is now being suggested that Ben Bernanke may not be reconfirmed as Fed Chairman. I see no coherent way that one can simultaneously make the case that Bernanke and the Obama Administration saved the economy from collapse and that he should not be confirmed. He’s either a hero or a goat. He cannot be both at once. And, if he is not responsible for saving the economy, it’s a lot more difficult to argue that the Obama Administration has been successful on that front, either.