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No Borrowers, No Blame


Banking problems are not currently a headline issue. When raised, the tone is almost invariably anti-bank. Barney Frank, Barry, and the chorus of talking heads are upset that banks aren’t making loans. As though these evil, greedy people are padding their fortunes by stuffing cash in their mattresses and somehow vicitmizing the hard-working middle class.


Barney Frank needs to get one piece of information firmly lodged in his brain - to a bank, deposits are liabilities and loans are assets. It's not that banks don't need and want to lend the money they have. It's that they don't want to lose the money they have, because then they will have to pay it back from their assets that are still good, thus suppressing lending further to good credit risks.

Demand for loans is dropping. Your conservative people who want to buy something on credit aren't going to spend the money until they feel they're getting a good deal. I know quite a few people with large amounts of cash, but all of them are financially prudent and will not spend until they really need something or until they see a very good deal. These types are well aware of the risks, and even 4% mortgages won't get them to buy a home that they believe will substantially depreciate over the next several years. The reason why they have the money is that they are prudent and cautious, and they didn't participate in the insanity. You are not going to get these types of companies and individuals to abruptly do stuff that seems risky. The banks don't have anything to do with it. The bankers would have orgasms if these people showed up asking for a loan.

A loan is a two-sided transaction. Both a willing lender and a willing borrower are necessary. Banks are in business to make loans. That’s how they earn their corporate jets and gold-plated toilets. The problem isn’t that banks don’t have money (TARP helped), it’s that borrowers don’t see a need for loans in an uncertain climate of economic doom.

If the person seen to be “in charge” of the economy keeps telling you we’re in horrible times, and that it will only get worse despite the government’s effort, would you risk your life’s savings against a business loan? Would a lender, already shocked by non-performing loans, take a chance on anything but the most sound and proven borrowers?

In a broader view, there are no victims. There are no evil overlords exploiting us. All the economic agents are making sensible choices according to the available information. Inventing intent, supposing malice, and crafting policy repsonses ot those fabrications only distorts the issue.