Chris Blanchet asked:
Tighter lending practices on the part of banks may make it difficult to obtain credit, even the face of the US President urging banks to repay their debt to taxpayers by loosening up those same strict lending practices. However, is tighter lending on the part of the big banks such a bad thing? Should the US President take a such a dominant position to force lending in the interest of stimulating the economy? Here are three arguments for letting the greedy and self-interest banks stick to their tighter lending practices.
1. While interest rates remain low to encourage people to borrow, asset prices remain very deflated in many areas. This means that even people who have not sold their homes will not be able to borrow the amounts they need. This begs the question: what good will refinancing only part of a person’s debt do? Will it help if there is still a strong risk of default? Keeping the tight lending practices means banks will not be increasing people’s debt load, thereby reducing default probabilities and keeping people in their homes and out of Bankruptcy protection. In this case, the banks are actually helping the economy because people are not using assets to secure debt that will eventually go bad.
2. Looser lending practices might improve the economy on the surface, but with people getting into more and more debt, it will create an “echo” of the recession down the road. Remember, unemployment remains high at 10%. While there is promise that employment statistics are improving, the reality is that a lot of people continue to be out of work. This means that if the banks loosen lending requirements and start giving money to people who are out of work or who may soon be out of work because of this “echo” effect, then these same banks will need yet another bailout because they were forced to lend when they should not have.
3. Tighter lending practices forces people to improve their debt reduction as well as their savings rates. By forcing people to save and repay debt, banks are actually making people better off in the long-term, including the taxpayer who will have less of a burden in the future when so many people retire with under-funded retirement plans. Ideally, reducing debt should be a top priority for working individuals at a time like this anyway. The recession was a difficult time for a lot of folks; greater savings and less debt would have made the cyclical reality of recessions a lot easier for people to weather and get through unscathed. This was obviously not a reality. By allowing banks to make better lending decisions, people will be forced to improve their savings rates and while this does not improve the economy during the current Presidential term, it allows for a much more prosperous nation in the years that will follow.
These three arguments make great sense if the purpose is to improve the nation’s economic strength at a deep-roots level. Better savings rates, less delinquency and defaults, and better asset values work in everyone’s favor, but these things take time. If, however, the objective is to give the economy more of the same superficial strength that led to its collapse in the first place, then indeed lenders should loosen their underwriting requirements and let the cards fall where they may.
Caffeinated Content
Tighter lending practices on the part of banks may make it difficult to obtain credit, even the face of the US President urging banks to repay their debt to taxpayers by loosening up those same strict lending practices. However, is tighter lending on the part of the big banks such a bad thing? Should the US President take a such a dominant position to force lending in the interest of stimulating the economy? Here are three arguments for letting the greedy and self-interest banks stick to their tighter lending practices.
1. While interest rates remain low to encourage people to borrow, asset prices remain very deflated in many areas. This means that even people who have not sold their homes will not be able to borrow the amounts they need. This begs the question: what good will refinancing only part of a person’s debt do? Will it help if there is still a strong risk of default? Keeping the tight lending practices means banks will not be increasing people’s debt load, thereby reducing default probabilities and keeping people in their homes and out of Bankruptcy protection. In this case, the banks are actually helping the economy because people are not using assets to secure debt that will eventually go bad.
2. Looser lending practices might improve the economy on the surface, but with people getting into more and more debt, it will create an “echo” of the recession down the road. Remember, unemployment remains high at 10%. While there is promise that employment statistics are improving, the reality is that a lot of people continue to be out of work. This means that if the banks loosen lending requirements and start giving money to people who are out of work or who may soon be out of work because of this “echo” effect, then these same banks will need yet another bailout because they were forced to lend when they should not have.
3. Tighter lending practices forces people to improve their debt reduction as well as their savings rates. By forcing people to save and repay debt, banks are actually making people better off in the long-term, including the taxpayer who will have less of a burden in the future when so many people retire with under-funded retirement plans. Ideally, reducing debt should be a top priority for working individuals at a time like this anyway. The recession was a difficult time for a lot of folks; greater savings and less debt would have made the cyclical reality of recessions a lot easier for people to weather and get through unscathed. This was obviously not a reality. By allowing banks to make better lending decisions, people will be forced to improve their savings rates and while this does not improve the economy during the current Presidential term, it allows for a much more prosperous nation in the years that will follow.
These three arguments make great sense if the purpose is to improve the nation’s economic strength at a deep-roots level. Better savings rates, less delinquency and defaults, and better asset values work in everyone’s favor, but these things take time. If, however, the objective is to give the economy more of the same superficial strength that led to its collapse in the first place, then indeed lenders should loosen their underwriting requirements and let the cards fall where they may.
Caffeinated Content
