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Jewish World Review January 20, 2010 / 5 Shevat 5770 Chairman Bernanke, Use Your Existing Authority to Compel Banks to Lend to Creditworthy Applicants By Ed Koch
http://www.JewishWorldReview.com |
Led by Chairman Ben Bernanke, the Federal Reserve is in the fight of its
life.
Congress is considering legislation that would limit the Fed's authority
as chief watchdog over Wall Street. According to The New York Times,
Bernanke believes that "being able to monitor the health of banks was
crucial to setting sound monetary policy." Bernanke's 11-page report to
the U.S. Senate Banking Committee argued "that stripping the Fed of its
powers would leave the financial system more vulnerable to collapse."
With their powers, the Feds permitted a meltdown to occur, and it was Hank
Paulsen, Secretary of the Treasury under President George W. Bush, who got
the Congress — which first voted down the proposed bailout — to reverse
itself and approve the original bailout with more to follow.
Many believe that if the bailouts had not taken place, with billions of
dollars being given to the banks, AIG, General Motors and Chrysler, and if
the country had allowed bankruptcies to take place, the U.S. would have
come through the crisis in even better shape. The poster boy for this
laissez faire approach is of course, Ford Motors which took no bailout
funding and is now leading the automotive industry.
My own questioning of Ben Bernanke's logic with respect to continuing the
Federal Reserve's enormous sole authority comes from my exchange of
correspondence with him, beginning with my letter of October 9, 2008. My
letter stated:
"As you have pointed out, the meltdown occurring in the United States is
taking place in large part because of a lack of available liquidity,
meaning that lenders - commercial banks in the lead - are not lending to
applicants seeking to borrow in order to purchase housing, cars and other
big ticket items that the economy relies on to flourish, as well as
denying loans to small businesses and local governments seeking to borrow
to pay their bills with municipal bond markets largely closed to them.
One of the purposes of the $700 billion recently made available as a
result of legislation enacted by the Congress is to give additional
liquidity to commercial banking institutions so that they can once again
perform their leading raison d'etre - lending money. The major reason for
lack of liquidity - availability of loans - is fear, as you have stated,
fear that the money will not be repaid either by individuals, governments
or institutions, e.g., other banks.
If I have s accurately stated the facts, why not by order of the United
States Treasury and Federal Reserve direct the commercial banks to
immediately commence loaning money to "creditworthy" applicants and at a
scale comparable to loans individual banks entered into last year? If the
banks refuse to abide by such order, they would not be eligible among
other punitive measures to sell their "toxic" securities to the Treasury.
If the banks require a definition of "creditworthy," your offices will
supply it for the various situations that apply."
To his credit, Bernanke responded on October 16, 2008. Often government
officials at every level of government simply ignore letters that raise
annoying issues for them, as I think my letter did. His response,
laudatory because he answered, was not satisfactory. He wrote:
"But requiring directly that banks extend specified amounts of credit to
creditworthy borrowers would entail many complications. For example, bank
regulators would need to create an objective definition for determining
which borrowers were creditworthy. Moreover, because the volume of banks'
credit activities can fluctuate over time for a variety of reasons,
including those over which they have no control (such as the rate of
economic growth in their geographical regions), determining appropriate
targets for individual banks' lending activities would be complex and
potentially arbitrary."
I was particularly struck by his statement, "In addition, because of the
very large number of banking institutions in the country - more than 8,000
- administering such a program would be extremely resource intensive."
A federal agency administering to 8,000 or so institutions in today's
economy should consider itself lucky, particularly when it was created to
do exactly that.
I wrote to him the day of the lunch, November 17, 2009, asking once again,
as I did in my letter of October 9, 2008, a year before:
"If I have accurately stated the facts, why not by order of the United
States Treasury and Federal Reserve direct the commercial banks to
immediately commence loaning money to 'creditworthy' applicants and at a
scale comparable to loans individual banks entered into last year? If the
banks refuse to abide by such order, they would not be eligible among
other punitive measures to sell their 'toxic' securities to the Treasury.
If the banks require a definition of 'creditworthy,' your offices will
supply it for the various situations that apply. Apparently, your
"guidance" of November 2008 to the banks has not had the result you had
hoped for. Shouldn't there be consequences to the banks for failing to
take the measures required to substantially increase liquidity for small
businesses which provide more jobs, we are told, than the large businesses
of this country and are perhaps unable to perform that function because of
the lack of credit?"
The Chairman responded by letter dated November 19, 2009, writing:
"Finally, I do not think it would be appropriate for bank regulators to
substitute their judgments regarding individual loans for those of
experienced bank lending officers. The lending decisions of banks are
directly reflected in their institutions' profits and losses, riskiness,
and growth prospects and thus have a direct effect on the interests of
their shareholders. In a market-based economy and financial system, it is
more appropriate for bank directors and managers, as representatives of
the shareholders, rather than regulators, to make such decisions."
Surely, the Federal Reserve could use its current authority to work out a
reasonable way to deal with this issue. Indeed, that is its job. That is
why it wants to keep its authority, opposes the efforts of those who seek
to strip it of some of its authority and have Congress retain some of the
regulatory authority. The response of the Chairman gives me pause. I
have a high regard for Chairman Bernanke and believe that if he gave this
issue of liquidity greater attention, he could come up with the
appropriate carrots and sticks that would compel liquidity to emerge, not
next year, but next week. The banks that dominate this country's business
activity had money shoveled to them by the Federal Reserve, U.S. Treasury
and the U.S. Congress, with nearly no interest to be paid, and many still
owing the U.S. Treasury those TARP monies and are using their current huge
profits to pay huge bonuses to their executives and employees, while still
not lending to American businesses and individuals.
One way to allow the banks to make the decision on creditworthiness and
still spur lending, is to require they make available to the Federal
Reserve the reasons they declined to loan on the basis of lack of
creditworthiness in individual cases, with the Federal Reserve randomly
examining those files to determine good faith.
Mr. Bernanke, use your existing authority to make them lend.
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JWR contributor Edward I. Koch, the former mayor of New York, can be heard on Bloomberg Radio (WBBR 1130 AM) every Sunday from 9-10 am . Comment by clicking here.
© 2010, Ed Koch |
Arnold Ahlert | |||||||||||||
