"Behind The Scenes Of Imprudent Bank Loans" by Alan Reynolds (Cato Institute: Commentary)

"Behind The Scenes Of Imprudent Bank Loans" by Alan Reynolds (Cato Institute: Commentary): "'Bank Lending Keeps Dropping,' according to a recent front-page Wall Street Journal headline. But the Treasury Department statistics used in that article did not measure total bank lending. Instead, the figures include only $231.4 billion of monthly 'loan originations' at 21 of the nation's 8,300 banks — namely, those that received the biggest 'capital infusions' (loans) from the TARP program."

"Speaking in Trinidad-Tobago, President Obama nonetheless complained, "Banks still are not lending at previous levels." So what? Why would anyone expect banks to lend as much while the economy was shrinking as they did when it was growing? When people buy fewer cars and houses, they don't need as many auto loans and mortgages. When retail businesses and car dealers are raising cash by liquidating inventories, they don't need to borrow to buy more inventories."

"When households and firms borrow sensibly, they are borrowing against expected future earnings or against accumulated wealth (assets minus debts). Debt does not allow people to live beyond their means. On the contrary, heavily indebted consumers actually acquire fewer goods over time, because so much of their budget is wasted on interest payments."

"The Obama administration has repeatedly frightened bank stockholders with threats of quasi-nationalization, putting taxpayers at risk for trillions of dollars in the process, ostensibly because of a quixotic crusade to get banks to lend "at previous levels." If so — that is, if the intent of the TARP plan was to induce banks to hand out loans at a faster pace than before last November — then the program has evidently been useless, if not harmful. Yet increased bank lending couldn't possibly have been the real goal, since much of the federal loot went to investment banks that never wanted any part of this scheme. After all, nobody goes to Goldman Sachs or Morgan Stanley looking for a loan.

The deeper purpose of the Treasury's "capital purchase plan" appears to have been quite different — namely, to ensure that big financial firms will now be managed according to the principles of politics rather than economics. And that can also explain why the administration is so suspiciously reluctant to allow TARP supplicants pay back the loans."