Asking the Most Indebted Entities to Lend
Justin Katz
Does the capacity to have government do it — "it" being everything and anything — ever end? I ask in response to Brian Hull's musings on small-businesses' access to capital:
How do we solve the lending problem? One way to increase lending is for the state to do it directly. If banks are unwilling to lend, and lack of access to capital is stymieing growth in Rhode Island, then I would argue that it is contingent upon the government to assist. Rhode Island should establish a loan program targeted specifically for expanding access to capital for locally-owned and operated small businesses that wish to expand their business, but are unable to do so because of rigid lending practices.
[Note: I think he means "incumbent upon government."]
Realizing that the money would have to come from somewhere, Brian lists all of the possibilities but those from a conspicuous category:
There are a couple places to look, and each has benefits and challenges. The state could borrow the money from the federal government or from national lending institutions. The state could change its tax laws to generate more revenue in order to lend. The state could eliminate existing corporate subsidies that benefit large employers with no positive economic effect (the state should eliminate these anyway). The state could establish a state-run bank funded by the current deposits held by the state and its cities and towns (I’ll write more about the benefits of a state-run bank in another article).
Without even bothering to list the possibility that the funds to lend could be shifted from some other area of current spending, Brian suggests that the most deficit-ridden entity in the state of Rhode Island should put itself into further debt in order to lend. And one way it could do so entails asking to borrow from the most indebted entity in the world — the United States government!
As far as I can tell, the only advantage that a government entity has, in just about any capacity, is that it can take money by force. That shouldn't be the first principle of economic recovery — especially for a small state that is easily left.
This 'the banks aren't lending' argument is starting to bother me a lot.
The banks are lending. I bought a house in November, 2008. I re-financed in June. I'm getting credit offers left-and-right in the mail.
They just have stricter lending policies. You have to have really good credit, a solid business plan, and good numbers to show them.
Isn't lending to people and businesses that didn't have those things how we got ourselves into this mess?
Really though, we're just going to have to get used to the idea that you can't walk into a bank with a smile and walk out with bundles of cash anymore, no matter how optimistic you are about your own financial well-being. You can no longer borrow money when you're losing money, or borrow money because you can't make payroll, that's the way it's supposed to work. Frankly, I'm glad things have become reasonable again.
Back in 2005 I was pre-approved for a home loan that was -twelve times- my annual income. When I pointed out that the payment would be 98% of my income when the introductory period ended, she said, "but you'll be making much more in a few years!". I ran hightailed-it out of the bank, swearing to never do business with them again.
I listened to an episode of EconTalk yesterday on the ride to work (I'm going through their old podcasts) in which the host was discussing the housing meltdown with another economist and they argued that there is not really a credit crunch going on at all. Banks are lending below $417,000, they have simply reverted to their old lending standards which were far more cautionary and from before when the government started artificially stimulating housing lending through the Fed and GSEs. That people want to artificially induce banks to make housing loans to get us out of this recession is particularly ironic. The crash was a market correction for decades of bad public policy. The answer is more of the same practices that got us into this mess, government interventionism into the housing market and subsidization of bad loans?
Mangeek has got it right.
More importantly, as Justin suggests, when are people going to realize that it isn't Government's job to play wet nurse.
When gov't gets involved in "creating jobs", all it does is play a game of wealth redistribution from productive members of society to non-productive members.
RI is a disastor for the exact reason the Governor alluded to in his state of the state address.
That is, RI was founded on the principals of liberty, independence and self-reliance. We even have the independent man atop the statehouse as a symbol of our early independent roots & spirit.
We now have a state that is just the opposite.
We are now a state full of dependents.
We have hoards of social welfare dependents coupled with flocks of union entitlement-minded dependents who wouldn't know self-reliance if it hit them in the head ...all sucking off the tit of the few remaining productive members left in the state.
These leeches believe gov't exists so that they can subsist.
We need a radical and ruthless change in mindset to turn back the tide. What we need is a guy like Steven Laffey, who is not only not afraid to have the necessary fight, but relishes the idea of having the fight.
So let's hope he reconsiders his current position. It is probably the last chance we have to salvage the disastor that the non-self-reliant dependents have wrought.
While our mortgages are important to us, the real economic problem is lack of credit to businesses, particularly small businesses.
An overloading of consumer credit is one of the causes of the present recession. America in aggregate had a negative savings rate for many years. This was unsustainable and we are now seeing how de-leveraging constricts economic activity as people pay their bills rather than buy more stuff.
Increasing consumer credit now will not help the economy, because at some point those consumers will have to service that debt out of their incomes.
However, the curtailing of small business credit on which many producers relied as long-term capital, has forced many businesses to cut back operations, which increases unemployment and decreases the sales of their suppliers.
It's like a law of physics. The asset and consumption bubbles of the past twenty years were largely built on increased debt/equity of consumers, due to low interest rates and easy credit availability. De-leveraging has the opposite effect.
I hate to say it, but the defined-benefit pension system is also a cause. People who believe they are set for life, because their pensions are pegged to maintain the lifestyle of their highest-paid working years, consume rather than invest.
BobN writes:
"America in aggregate had a negative savings rate for many years."
This was always expalined with "Americans are buying houses rather than saving, that is a form of saving".
Sure and when your car needs a $2400 transmission job, you draw it out of your "House Account". Actually, I suppose you could, with a second mortgage/equity line. Think about that, a second mortgage (how old fashion that sounds) on the family manse to repair a car.
Actually, the banks have gone into the high interest, small loan business again. They don't even try to kid you about what "overdraft protection" is. Need a new TV, here have an "overdraft".
I don't think I have heard of direct government loans until the "bailouts". Most gvt. agencies "guarantee" a loan from a private lender.
Actually banks are lending. They just aren't lending to those with shortsighted, economically unfeasible entities. Here in RI, with the business climate so bad, very few fit the description. No longer is it acceptable that you are a minority, so we'll give you the loan. OR that you have some other politically correct profile, you get the loan whether you deserve it or not. No longer is it viewed as a right to have a home you can't afford. Or, since you live in Olneyville, you can hold a gun to the banks head and say if you don't give me this loan, I'll get a hundred of my minority friends and picket your bank and hold up your merger plans.
Funny how what goes around comes around.
Affirmative action was always a stupid lending policy. Too bad it cost so much to learn learn it.
Maybe Brian Hill and his liberal friends can get pinkos like George Soros and his friends to start putting their money where their mouth is. Don't hold your breath waiting for it to happen. They'll insist it happens with your money, not theirs.
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This 'the banks aren't lending' argument is starting to bother me a lot.
The banks are lending. I bought a house in November, 2008. I re-financed in June. I'm getting credit offers left-and-right in the mail.
They just have stricter lending policies. You have to have really good credit, a solid business plan, and good numbers to show them.
Isn't lending to people and businesses that didn't have those things how we got ourselves into this mess?
Really though, we're just going to have to get used to the idea that you can't walk into a bank with a smile and walk out with bundles of cash anymore, no matter how optimistic you are about your own financial well-being. You can no longer borrow money when you're losing money, or borrow money because you can't make payroll, that's the way it's supposed to work. Frankly, I'm glad things have become reasonable again.
Back in 2005 I was pre-approved for a home loan that was -twelve times- my annual income. When I pointed out that the payment would be 98% of my income when the introductory period ended, she said, "but you'll be making much more in a few years!". I ran hightailed-it out of the bank, swearing to never do business with them again.
Posted by: mangeek at January 30, 2010 2:15 PMI listened to an episode of EconTalk yesterday on the ride to work (I'm going through their old podcasts) in which the host was discussing the housing meltdown with another economist and they argued that there is not really a credit crunch going on at all. Banks are lending below $417,000, they have simply reverted to their old lending standards which were far more cautionary and from before when the government started artificially stimulating housing lending through the Fed and GSEs. That people want to artificially induce banks to make housing loans to get us out of this recession is particularly ironic. The crash was a market correction for decades of bad public policy. The answer is more of the same practices that got us into this mess, government interventionism into the housing market and subsidization of bad loans?
Posted by: Dan at January 30, 2010 3:21 PMMangeek has got it right.
More importantly, as Justin suggests, when are people going to realize that it isn't Government's job to play wet nurse.
When gov't gets involved in "creating jobs", all it does is play a game of wealth redistribution from productive members of society to non-productive members.
RI is a disastor for the exact reason the Governor alluded to in his state of the state address.
That is, RI was founded on the principals of liberty, independence and self-reliance. We even have the independent man atop the statehouse as a symbol of our early independent roots & spirit.
We now have a state that is just the opposite.
We are now a state full of dependents.
We have hoards of social welfare dependents coupled with flocks of union entitlement-minded dependents who wouldn't know self-reliance if it hit them in the head ...all sucking off the tit of the few remaining productive members left in the state.
These leeches believe gov't exists so that they can subsist.
We need a radical and ruthless change in mindset to turn back the tide. What we need is a guy like Steven Laffey, who is not only not afraid to have the necessary fight, but relishes the idea of having the fight.
So let's hope he reconsiders his current position. It is probably the last chance we have to salvage the disastor that the non-self-reliant dependents have wrought.
Posted by: Over-taxed at January 30, 2010 3:36 PMWhile our mortgages are important to us, the real economic problem is lack of credit to businesses, particularly small businesses.
An overloading of consumer credit is one of the causes of the present recession. America in aggregate had a negative savings rate for many years. This was unsustainable and we are now seeing how de-leveraging constricts economic activity as people pay their bills rather than buy more stuff.
Increasing consumer credit now will not help the economy, because at some point those consumers will have to service that debt out of their incomes.
However, the curtailing of small business credit on which many producers relied as long-term capital, has forced many businesses to cut back operations, which increases unemployment and decreases the sales of their suppliers.
It's like a law of physics. The asset and consumption bubbles of the past twenty years were largely built on increased debt/equity of consumers, due to low interest rates and easy credit availability. De-leveraging has the opposite effect.
I hate to say it, but the defined-benefit pension system is also a cause. People who believe they are set for life, because their pensions are pegged to maintain the lifestyle of their highest-paid working years, consume rather than invest.
Posted by: BobN at January 30, 2010 7:34 PMBobN writes:
"America in aggregate had a negative savings rate for many years."
This was always expalined with "Americans are buying houses rather than saving, that is a form of saving".
Sure and when your car needs a $2400 transmission job, you draw it out of your "House Account". Actually, I suppose you could, with a second mortgage/equity line. Think about that, a second mortgage (how old fashion that sounds) on the family manse to repair a car.
Actually, the banks have gone into the high interest, small loan business again. They don't even try to kid you about what "overdraft protection" is. Need a new TV, here have an "overdraft".
I don't think I have heard of direct government loans until the "bailouts". Most gvt. agencies "guarantee" a loan from a private lender.
Posted by: Warrington Faust at January 30, 2010 10:05 PMActually banks are lending. They just aren't lending to those with shortsighted, economically unfeasible entities. Here in RI, with the business climate so bad, very few fit the description. No longer is it acceptable that you are a minority, so we'll give you the loan. OR that you have some other politically correct profile, you get the loan whether you deserve it or not. No longer is it viewed as a right to have a home you can't afford. Or, since you live in Olneyville, you can hold a gun to the banks head and say if you don't give me this loan, I'll get a hundred of my minority friends and picket your bank and hold up your merger plans.
Posted by: Mike Cappelli at January 30, 2010 10:54 PMFunny how what goes around comes around.
Affirmative action was always a stupid lending policy. Too bad it cost so much to learn learn it.
Maybe Brian Hill and his liberal friends can get pinkos like George Soros and his friends to start putting their money where their mouth is. Don't hold your breath waiting for it to happen. They'll insist it happens with your money, not theirs.