Tuesday, January 12, 2010

The Solution for Excess Being More Excess

Recently, politicians have been saying that more lending is necessary for the economy to recover quickly. While with bank CEOs in December, President Obama urged them to "take a third and fourth look" at their lending practices and announced that the administration's focus over the next several months will be "geared towards catalyzing and spurring additional lending, particularly to small businesses."

These political inducements to increase lending may do more harm that good. In a market economy, banks do not need any convincing to lend to sound businesses with profitable projects. The profit motive is usually sufficient. What politicians typically want is for banks to lend for projects that are not necessarily sound or profitable. Urging the banks to lend more than they would choose pushes them towards the risky practices of the past. More lending is unlikely to be a solution to the crisis brought about by excessive debt levels. Excesses are not overcome by still more excesses.

-Polina Vlasenko, Research Fellow, AIER, in "More Lending Isn't the Answer," Research Reports, January 11, 2010.

But if the banks won't do the lending, the federal government will.

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