U.S. Must Start Flow of Credit Again

Wednesday, 23 Sep 2009 02:42 PM

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Federal Reserve Chairman Ben Bernanke recently declared that the U.S. recession, which nearly reached the depths of the 1930s’ depression, is technically over. Troublesome, however, is the comparison between the current economic conditions of the U.S. and China.

The New York Times reported on Sept. 18, “The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.”

One of the reasons cited by the Times for China’s success was “liberal bank lending.” Our Federal Reserve declined to compel such a policy to creditworthy applicants. It was left to the banks to decide how to spend the TARP monies that the federal government poured into their coffers. Those monies have been used by some to buy other banks and to pay huge bonuses to their employees.

I wrote to Bernanke last year asking why he declined to compel such lending. He replied:

“Dear Mr. Koch. I am responding to your letter of October 9, 2008, in which you recommend that the Treasury or bank regulators direct commercial banks to lend to creditworthy borrowers. You further suggested that banks that did not comply with such a directive would be ineligible to participate in the Treasury’s Troubled Asset Relief Program (TARP).

We at the Federal Reserve firmly agree that an unfreezing of financial markets and a resumption of lending activity is essential. Credit is the lifeblood of an economy, and continued economic growth will requite that substantial credit flows be restated.

But requiring directly that banks extend specified amounts of credit to creditworthy borrowers would entail many complications. For example, bank regulators would need to create an objective definition for determining which borrowers were creditworthy. Moreover, because the volume of banks’ credit activities can fluctuate over time for a variety of reasons, including those over which they have no control (such as the rate of economic growth in their geographical regions), determining appropriate targets for individual banks’ lending activities would be complex and potentially arbitrary. In addition, because of the very large number of banking institutions in the country — more than 8,000 — administering such a program would be extremely resource intensive.”

I think Bernanke was mistaken. Because of our government’s reluctance to compel banks to lend, our economic recovery has been much slower than it need to have been.

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