A scramble to unlock bank lending
US regulators are cranking out an array of options.
New York and baltimore
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But the banking system, after writing off hundreds of billions of dollars in bad loans, is not in the mood or may not have the capacity to provide loans to everyone who deserves one.
So now regulators are weighing what steps to take next to unclog the banking system and kick-start the nation's loan officers into lending again to businesses, states, home buyers, and people who just want to buy a car.
Among the ideas: Use taxpayer dollars to buy stakes in troubled private banks, in a bid to strengthen the banks' balance sheets so they will be better positioned to lend. Another is for the Federal Reserve to expand its loanmaking to include mom and pop, not just large companies. Then there's the notion of changing US tax laws to allow the banks to get big refund checks from the Treasury.
All these suggestions come even after the Federal Reserve on Wednesday made an emergency interest-rate cut of half a percent, the world's central banks have flooded the financial markets with hundreds of billions of dollars, and Congress has passed a $700 billion bank rescue plan.
"What has happened is that all the credit managers have slammed on the brakes and the train has slowed to such an extent it is barely moving," Mr. Bethune says. "How do you get the train moving again?"
One way might be for the US Treasury to use some of the $700 billion authorized in the rescue plan as new capital for the banks, rather than buying at auction the troubled debt securities held by the banks.
"It's quicker if you do direct injection instead of buying troubled assets," says Lyle Gramley, a consulting economist at Stanford Washington Research Group and a former governor of the Federal Reserve.
Injecting capital directly into the banks also would give more heft to the money, says James Barth, a senior finance fellow at the Milken Institute in Santa Monica, Calif. "For every dollar of capital, you can lend multiple dollars, whereas when you buy up troubled assets, you do not increase capital," says Mr. Barth, a former bank regulator during the Reagan and Bush administrations.
There is precedent for the government (and, by extension, US taxpayers) in effect becoming a shareholder in private financial institutions in a bid to save them. "We did it during the bailout of the savings and loans in the 1980s, when the government took equity warrants in the institutions," he says.