Back Off the Pressure to Increase Lending

Bernard Condon and Stevenson Jacobs write for the AP:

Unlike big-city bankers, Stan Wilmoth didn’t make lots of dumb loans during the boom. After the crash, he accepted not a dime of taxpayer money for his bank. His salary? “Substantially less” than the $1 million the former head of Merrill Lynch spent remodeling his office, he says. He credits his grandfather, a Protestant minister, with giving him “moral fiber.”

But judging from the rhetoric coming out of the Obama administration, Wilmoth, the folksy 58-year-old president of Heritage Bank of Reno, Nev., should be scorned, not praised. His sin? He’s shirking his patriotic duty by not lending enough money to his community.

Read the whole AP story here. (HT: FinReg21)

Last week President Obama met with the top bank CEOs in the country and asked them to lend more. Why? To stimulate the economy. Of course he has also told them that if they return to the risky lending practices of housing boom period that he will sick new government agencies on them and break apart their businesses. He might do that anyway. But nevertheless, the mixed message from the White House is increasingly disturbing. It is a double PR win for the President—tell bankers to give more to local communities and give them a stern verbal shakedown that all of Main Street supposedly wants to yell at Wall Street. But bankers can’t do both, and they should ignore the meddling from Washington on both fronts.

If banks aren’t lending right now it is for two reasons: either they don’t feel comfortable returning to wide scale lending given the shaky market and are trying to stabilize their businesses, or they are being more prudent with who they lend to. We can’t use the lending standards of the past few years as the benchmark for when the market returns to full free flowing credit. Those were “bad” years. Lending standards were too loose. It would be a mistake to try and get back to that time of cheap credit because we’d just make the same mistakes as before.