Effects of Banks Not Lending

One thing we have a hard time understanding is that if someone gets in a major accident and is hurt severely, then do we expect him or her to start running in a matter of a short time. Depending on an injury, it may be days or months or even years before someone can resume his or her prior routine. Certain accident even cripple the person permanently. That person is going to take time to recuperate; first walk and then run. So is the case with the banking sector. Against that backdrop, why everyone is complaining that the banks are not lending? Of course, they cannot lend…at least not the way they used to. We need to get real about it. We need to get used to it...for now.

Why is there such a rush to lend? Because they lent too much earlier is the reason why we are in such a big mess in the first place. Why not give them a time to work its way out of this mess? What is wrong with those people complaining about banks? Mainstream media is making a same mistake again by hammering on this message now just as they were promoting housing mania earlier this decade and affect people’s psyche in a wrong manner. Our mainstream media needs to demonstrate more prudence and intelligence.

Our complaint is that those people and businesses really need the loan are not getting any. There can only be two reasons needing a loan. One is for a “Renewal” purpose due to maturity of an existing loan. The other reason is for a “Growth” purpose, be it a new construction or acquisition for a business person or a new housing loan for individuals.

To us, only the first reason – “Renewal” is critical enough, because, if the maturing loan does not get renewed then it can send even a healthy business into a default. Now, that is not good to push healthy businesses or individuals into default for no fault of their own. That is a plain and simple failure of a financial system and a tragic one at that. In that case, we propose that those maturing debts be renewed automatically for one year due to government's mandate. Then we revisit that issue a year later. Hopefully, banks will be somewhat healthier and we would not need to worry about that situation again.

As for the second reason – “Growth”, what is the worst thing that can happen? No new "deals". That is all. It is only natural that the recession occurs after such a big financial meltdown. In that case, we are going to have to compromise with the growth aspects of our economy. Once we turn healthy, we are sure going to grow again. We need not worry too much about the growth at this point in time, at least.

Bottom line is that as long as the maturing debts get renewed, there is no other ill-effect on the economy other than a lack of growth. What so wrong with that picture?