Several banks are repaying their government bailout money, partially so they don’t have to abide by executive pay limits which they say reduces their competitiveness. The President is telling banks that having benefited from the help of U.S. taxpayers, they have to lend more.
Article in pertinent part:
President Obama told some of the nation’s top bankers Monday that they need to explore “every responsible way” to make more loans.
BARACK OBAMA: “America’s banks received extraordinary assistance from American taxpayers to rebuild their industry. And now that they’re back on their feet, we expect extraordinary commitment from them to help rebuild the economy.”
Earlier, he criticized what he called “fat-cat bankers on Wall Street.”
Major banks have been doing well since the worst of the financial crisis shook Wall Street more than a year ago. Banks including Bank of America, Citigroup and Wells Fargo have recently announced plans to repay government rescue money.
First, does the President think he knows more about the optimal rate of lending then the banks? His statement that they need to explore “every responsible way” to make more loans suggests this interpretation. As profit-making enterprises, wouldn’t we assume that they were already doing this, and that the current diminution in lending is merely the most “responsible” reaction to a time of great economic uncertainty? If Obama believes he has a better handle on the responsible rate of lending than the banks, that would be pretty extraordinary arrogance, considering the example of the massive, systematic failure to ascertain the appropriate rate of lending in the housing market by pretty much every market actor in the past few years. Banks, consumers, and investors failed to adequately gauge the risk of home lending for the better part of a decade — obviously, this indicates that accurate risk assessments of lending are an easy problem which the President should be able to do better than everybody! Obama would hardly be the first political leader who thinks he is smarter than and can do better than every market actor combined, of course. It is still disturbing.
On the other hand, perhaps he is not that arrogant, and just sees the banks as an extension of social welfare policy, which should engage in certain lending practices without worrying about whether they are optimally profitable. Discussing banks as having an extraordinary commitment to help rebuild the economy would cut towards this interpretation. Banks have no such commitments — they have a commitment to profit. Perhaps the President thinks accepting the bailout money has imposed a moral obligation on the banks where one did not necessarily exist before, or enhanced the moral weight of a pre-existing obligation. Note to private enterprises: this is precisely the hazard of accepting government assistance. Of course, if the government expected a certain level of lending activity as part of the TARP loan “bargain,” it should have put that in the initial terms, rather than trying to effect a post-hoc bargain via altruistic moral pressure.
Finally, by tying the restrictions on CEO pay to the companies’ outstanding TARP loan obligations, the government made this result pretty inevitable. Once the government establishes that it will back up banks using taxpayer money, it makes those banks a much less risky asset, both by the actual present-moment transfer of wealth and by establishing a bad precedent for the future (in the form of a market expectation that if anything goes really bad, the government will come in and rescue).
As a result of this decrease in risk, the banks will have a much easier time raising capital in the private market. Any restrictions imposed by the terms of the initial government assistance itself, which are conditioned on having outstanding loan obligations to the government, can be gotten around by simply selling what is equity in a now very secure enterprise. This is what they are now doing. To do otherwise would be foolish. To expect otherwise would be to expect banks to act against their interests. To avoid this outcome, the solution is to either draft better regulations (for instance, making the executive compensation limits a permanent or long-lasting condition of accepting the loan initially, which endures even after repayment) or, and this would be my solution, simply stop meddling in the market to begin with. But whether you subscribe to the idea of government regulation or not, it’s clearly not the banks fault that the government can’t see 90 seconds into the future in drafting their market-meddling regulations.
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