Wednesday, December 9, 2009

Freeze or Get Down?

"Well, which is it, young feller? You want I should freeze or get down on the ground?" A great line from Raising Arizona. The confused bank customer asks this of an inept bank robber who has ordered everyone both to freeze and to get down on the ground.

The same scene will be replayed today at the White House when Barry O'B reportedly will sit down with a couple of too-big-to-fail bank CEOs. On the one hand, they've been told they screwed things up. They were greedy and preditory for making the loans that created the real estate bubble and the resulting meltdown of the financial system. They took too many risks and had to be bailed out at tax payer expense.

Now that they have become more cautious (the only thing in banking worse than not making a loan is making a bad loan), they're being told they're greedy for hoarding cash. They're not loaning money to small businesses to create jobs. This, of course, leads to higher unemployment which leads to such inconvenient outcomes as tea party protests and plummeting presidential popularity polls.

Well, which is it going to be, young feller? You want we should make good, safe loans that have a chance of being repaid or you want we should make risky small business loans that may in the short run create jobs and take the pressure off of you, Mr. President, but will surely add to the risk?

Loaning money to small business loans is tremendously risky. That's why Congress created the Small Business Administration--to make the loans that were too risky for bankers to make. You see, bankers have to make a profit or they go out of business. The SBA has never been profitable because even with government regulation, too many small businesses fail and default on their loans. Without the government backstop, many of those loans would never be made because they're too risky. (Kind of like the subprime loans that never would have been made had not the banks been pressured to do so by government regulators.)

In the end, tho, it just doesn't matter, Mr. Banker CEOs. You're too big to fail. Just make the loans, take the risk. The Government will just bail you out: it's Fannie and Freddie all over again.

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