How to Ease the Killer Credit Crunch
The nation’s bankers are in a quandary: to lend or not to lend. Making loans in normal times means making money. But these days, hoarding dollars is more important for the bankers’ ledgers. The resulting credit crunch may mean a longer recession--unless significant action is taken on the federal level to ease the squeeze.
If consumer confidence is at an all-time low, check the weak pulse of bankers. They are badly in need of some hand-holding from federal regulators whose practices have helped to make bankers unduly cautious. That, together with the double whammy of recession and war, has made bankers too reluctant to lend.
The Federal Reserve Board has cut interest rates six times since August. Under normal circumstances, this would jump-start lending because the cuts make borrowing cheaper and thus more attractive. But not this time around, partly because loan demand is weak. But a significant reason why credit remains stubbornly tight is that many bankers are struggling to meet rules requiring banks to maintain financial cushions against losses. But that task has been complicated by regulators who have moved aggressively to downgrade the value of loans and other lines of credit against current market values.
The banks’ reluctance also reflects the increasing number of problem real estate loans and the declining value of some bank assets and loans to debt-laden companies. As a result, banks must set aside more funds to offset possible losses and are less inclined to increase lending as the value of their loan portfolios decline. That leaves consumers and business struggling in a smaller pool of credit.
So it’s a good idea that bank regulators, which include the Federal Reserve, the Federal Deposit Insurance Corp. and the comptroller of the currency, are working on a package of initiatives designed to address the bookkeeping concerns of bankers. In addition, some forbearance by bank regulators could reduce the pressure on banks and create a more hospitable environment for lending.
That won’t yield instantaneous results, perhaps. But as Michael J. Boskin, chairman of the President’s Council of Economic Advisers, cautioned last week, the ongoing credit crunch could lead to a longer and more severe recession. No one wants that. So the President should make clear to federal bank regulators and the Treasury Department that it would be prudent to ease up a bit on bankers. Banks need to get back to the business of lending so the country can get out of its current credit blues.
