Are Banks Lending?

Joe Nocera argues in the NYTimes today that many banks are using their recapitalization to buy other banks rather than make loans. While he decries this tendency, it still represents some consolidation of the financial sector. That should make it healthier. I think that lending will be down because of fear of recession and tightening credit standards. After making so many bad loans, banks are going to look tougher at credit standards. That seems like a rational response to what has happened. It will make the recession more severe.

What this really points to is that now the recession is not due to lack of liquidity but to fear of lower earnings. The impact of the financial crisis has already been felt. Genie cannot get back in the bottle.

Economists' Views on the Recapitalization

The Wall Street Journal collected some opinions of academic economists on the recapitalization plan. One item of dispute seems to be whether it is better for the government to claim preferred or common shares. The former means more security for taxpayers and no voting rights. But it also could induce more risk taking on the part of banks close to the brink. Preferred shareholders get paid first, so for the common shareholders who are close to being wiped out more risk may be better.

Crisis Resolution

Momentum is building towards some type of bank recapitalization. A group of economists has published a set of essays describing how some resolution might take place. The essays are here. What is evident is that a broad group of academic economists see that some type of recapitalization is the way to go.