As I write this, the Secretary of the Treasury is on TV telling America that what we need to get out of the mess created by government encouraging banks to make bad loans to homeowners is for banks to make bad loans to small businesses.
The phrase I need to define here is, “bad loans.” What started the housing crisis was the government taking action to encourage, or in the case of Fannie Mae and Freddie Mac, require banks to make loans to people with inferior credit. This led to the debacle we face today.
Now the banks are being given a mandate by the Obama administration to make loans easier to get by small businesses. What Secretary Geithner is saying is: Make loans you would not otherwise make; that is, make loans to small businesses that you are not now making because of the bad prospects of the loans being paid back. And the government will do everything it can — print money or take it from the taxpayers — to make sure banks have the funds to do this.
The government has now said that it would guarantee these loans to small businesses just as it guaranteed the loans made by Fannie and Freddie. So banks will now make bad loans, knowing these loans will be paid back by the government if the businesses fail.(It all looks like a con game to me. How can we manipulate the system and public opinion so our friends and us can get more money?)
Please let us watch closely as this plays out in the economy. This will be revealed over a period of years, so don’t forget what was done today. If I am wrong and this does save the economy, I will apologize profusely.
March 18th, 2009 at 4:25 pm
VERY nice post! I must say I’m impressed. Most people are too busy vilifying banks to notice that the government is the one pumping monopoly money into the economy at an ever-increasing rate, and that money has to go somewhere (and devalue existing dollars as it does). Granted, the banks did make stupid decisions, but central bank monetary policy promotes misallocation of financial resources (such as making loans to support phenomenon such as the housing bubble, tech stock bubble, etc. that inevitably result in a crash).
I must say, I wasn’t expecting to read something like this when I came to this site, it’s a pleasant surprise to see that people know enough about Austrian economics to understand what’s really going on in the economy (for the curious, “Human Action” by Ludwig Von Mises, or “Man, Economy, and State” by Murray Rothbard).
Now then…