At a Treasury conference on jobs (11/18), Secretary Geithner railed against banks for not making enough loans, thus (his conclusion) hindering job growth.
He must feel that banks are turning down good (profitable) loans for some reason.
“Banks bear some responsibility for the extent of the damage caused by the crisis. And you carry a substantial obligation to help our communities get back on their feet”.
It sounds like he is arguing that since taxpayers bailed out some banks, the banks owed it to society to make some more bad loans. We created a lot of construction jobs in the last expansion by making a lot of bad loans (which were sold to unsuspecting investors and government agencies who knew, but felt compelled to buy anyway), I don’ think we want to go that route again.
First, keep in mind that banks are not venture capital firms, they are not supposed to take unusual risks.
So, complaints that banks wont make loans to new ventures are inappropriately directed at banks. Not in their job description as the regulators will tell them when its time for an audit.
Second, according to the National Federation of Independent Business survey (of their approximately 400,000 member firms) in October, only 4% of the owners say financing is their top business problem, compared to 33% who report “weak sales” as the top issue. Plans to invest in inventories and capital equipment and expansion are at 35 year lows – no sense in spending money on these items if there are not enough customers. Better to wait. This means loan DEMAND is low for these activities typically supported with borrowing.
Third, the same is true for hiring – owners don’t hire workers who have no customers to serve. Meantime, consumer saving is up, community banks have money to lend to small firms on Main Street (not your typical Goldman borrowers). And a tax credit for hiring wont get owners to hire workers (very costly) to get a few thousand dollars in tax credits. Workers will be hired when they can, in the judgment of owners, produce enough sales to pay for them. Lending firms more money wont create more sales.
Trying to push banks to make more loans (a) assumes they are turning down good loans and that the government knows better about loan risk and (b) assumes consumers are storming the walls trying to buy stuff but that firms wont get the inventory or buy the equipment to make stuff or hire workers to complete the sales because banks wont lend into these opportunities. The facts tell a different story. Lenders were careless about risk in the expansion, hopefully government is not pushing them to return to the old ways.
William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.