Loan Shark

There couldn't be a clearer example of the liquidity solution applied to the insolvency problem than this right here.

The strong arm of Government is forcing banks to lend the money that it forced them to take. This is all back asswards, but that is par these days. Usually it's the loan sharks strong man who forces the borrower to repay on preposterous terms, but now the White House is strong arming the strong mans boss. How wrong can this get?

Has anyone over there bothered to tell the naked boy emperor that the reason were in this mess is because too much money was lent to people who couldn't pay it back. Now the government tells the banks to lend more to even More credit unworthy borrowers. WHY?!

I get it, it keeps the ball rolling in the short term, or keeps the debt rolling over and over, until they leave office, but what happens when the new loans default and pile on top of the old loans that defaulted and the banks lose that money too, another bailout, followed by more forced lending, followed by another bail out, ... you get it too.

Seems like everyone gets it except the ones who can fix it. Ouch!


White House to banks: Start lending now

An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said.

The problem is that the banks were doing too much of what they are supposed to do, to too many they weren't supposed to do it to, lend money to those who couldn't pay it back.

Though there are limits on how much Washington can pressure banks, she noted that banks are regulated by the federal government.

"They will be watching very closely, and they're working with the banks," she said.

Anthony Ryan, Treasury's acting undersecretary for domestic finance, made the same point in a speech in New York before financial executives.

"As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy," Ryan told the annual meeting of the Securities Industry and Financial Markets Association. "It is in a strengthened institution's best financial interest to increase lending once it has received government funding."

This is the best example of why the bail out was the worst thing to do. Need I go further?

Said Perino: "The way that banks make money is by lending money. And so, they have every incentive to move forward and start using this money."

That's the way banks lose money when the loans don't get paid back.

There has been some evidence of easier lending, Perino said. But it's not enough to calm stock markets or help small businesses that depend on a free flow of credit, not just to expand but to maintain operations through making payroll or financing inventories.

The government is making efforts on several fronts to thaw the frozen credit markets and combat the worst financial crisis to hit the country since the 1930s. But so far, the efforts have shown little in the way of results. Libor, the London Interbank Offered Rate, a key goalpost for international lending, edged down only marginally on Monday and still remains at elevated levels.

The Federal Reserve began a program Monday to purchase the short-term debt of businesses, known as commercial paper. This market has been frozen since the collapse of Lehman Brothers spooked credit markets last month.

Under the authority of the $700 billion financial bailout plan approved by Congress and signed by President Bush earlier this month, the administration also plans to dole out $250 billion to banks in return for partial ownership. The Treasury Department, which is overseeing the massive capital injection program along with the rest of the bailout, will pour $125 billion into nine of the country's largest banks this week. Another $125 billion will go to other banks.

Treasury Secretary Henry Paulson has said the money was aimed at rebuilding banks' reserves so that they would resume more normal lending practices. But reports then surfaced that bankers might instead use the money to buy other banks. Indeed, the government approved PNC Financial Services Group Inc. to receive $7.7 billion in return for company stock and, at the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

Officials have said that there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.