How's That Bailout Working For Ya?

I was hoping to finish a comprehensive post on the Credit Crisis that Never Actually Happened (data is now out through October 15; another all-time record high for lending), but that's going to have to wait 'til after Election Day. For now, let's look at what our panic bought us:

The infusion of federal money is to rebuild banks’ battered capital reserves so the institutions would feel comfortable resuming more normal lending practices. But that confidence was undercut somewhat when reports surfaced that bankers might 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 on Friday and, at the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

There is little federal officials can do about it. There is no language in the bailout bill that specifically obligates banks receiving money to increase their loans. Officials had argued that attaching strings to the capital-infusion program would discourage financial institutions from participating.

Hell, yeah, the bank will take your money. They've got plans, suckers, and since they're already lending at record rates, why not use the windfall to buy up the competition?

I've highlighted the phrase "resuming more normal lending practices" because that's exactly what we don't want banks to do. The recent norm for banks has been subprime loans and consumer credit for all takers. All these stories about people not getting their home loans or having credit cards denied? What did you expect? We told the banks and other lenders to fix their reckless lending practices. On the margin, of course, there are going to be people denied credit now who could get it earlier. (Once again, however, keep in mind that the Fed data shows that credit is still growing in the aggregate.)

Later: Don't get me wrong; I'm not saying that everything is just peachy. What I am saying is that a credit crunch wasn't one of our problems requiring giving unprecedented power to the federal government. At least not a current credit crisis. With the way things are going south now, it's not hard to believe that at some point the crunch will actually arrive.

posted by Gabriel Malor at 11:39 PM

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