Yesterday, President Obama met with the heads of many of the nation’s largest banks and investment firms in an attempt to push the banks to get more money flowing into the economy.
According to Obama, these banks and investment firms have an obligation to modify more mortgages and create more small business loans due to the fact tax-payers helped to keep the banks afloat during the height of the financial crisis.
I agree with Obama that these banks – many of whom are handing out record bonuses and reporting massive profits after received TARP funds – have an obligation to help rebuild the economy by being more receptive to mortgage modification and lending to small business. However, I can’t help but think back to one of the main reasons we got in this financial crisis in the first place – it was too easy to get loans.
While I don’t think Obama is asking the banks to blindly make new loans or modify existing ones for anybody with a pulse, I can certainly see why many of these firms continue to be tight with their capital.
With unemployment continuing to climb, there is bound to be even more defaults over the coming months, which will obviously hurt these banks’ balance sheets. If they’ve over extended themselves by making too many new loans, we could see ourselves facing another financial crisis and TARP round two situation.
Recessions brought upon by deleveraging – which this one most certainly is – tend to be much longer and more severe in nature than usual “business cycle recessions.” So, while I think Obama’s intentions are in the right place, it is entirely possible that the best long term solution for this financial crisis and recession is to continue to let lending be tight, let the bad loans get flushed out of the system, and then return to stable investment driven (not debt fueled) growth a few years down the road.
