Why Loan More?

Today your political heroes once again expanded the alphabet soup of “lending facilities” designed to unfreeze credit markets.  First, the Fed will purchase up to $600 billion in mortgage loans backed by Fannie Mae and Freddie Mac.  These two government-sponsored entities, you may recall, were founded for the explicit purpose of taking risk off the back of banks and were themselves supposedly rescued in September.  Having been saved, why is it necessary to save them again?  The answer is unclear.

A separate program will allow the Fed to spend up tp $200 billion to support consumer and small-business loans.  The goal is to bring down long-term interest rates and encourage banks to make more loans.  My question: why?  The reason we are in this mess is that banks made too many loans to people and businesses with questionable credit.  How can making more such loans be the solution?

The fact is that we – and by “we” I mean all Americans collectively – lived too high on the hog for too many years.  Even those who didn’t borrow directly enjoyed the benefits of a liquidity-driven booming economy.  Now it’s time to pay the piper.  And the piper must be paid.

Unfortunately, no one knows what the final price tag will be.  Financial assets totaling trillions of dollars have been destroyed this year.  The government is spending trillions more in the various bailout programs – borrowed money that will ultimately have to be sucked out of the private sector, one way or the other.

For the politicians, doing nothing is simply not a realistic option even if it the best option.  People are indeed hurting, and the pain is far from over.  It would be nice if our leaders would accept that the pain is inevitable and do what they can to relieve it.  Instead, they want to pretend it can be avoided.  In so doing, they are simply prolonging the suffering.

photo credit: TheTruthAbout…