There is a lot of misguided brouhaha in Congress about getting banks to lend. Here is one such story that typifies the Congressional madness: Frank Says Obama to Force Banks in TARP to Lend More.

House Financial Services Committee Chairman Barney Frank said President Barack Obama will require banks receiving government aid to lend more to businesses and consumers, saying the Bush administration “made a mistake” by not setting stricter rules for institutions getting funds from the $700 billion financial-rescue package.

“I think you’re going to see the Obama administration, having learned from that, push for much more lending,” Frank said today on ABC’s This Week. “There are going to be some real rules in there.”

Keep Your Money But Lend It

MoneyNews offers another look at the situation in Banks: Feds Telling Us to Keep Cash and Lend It.

Banks that are being scolded by the government for not lending are blaming a new obstacle: The government itself. Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?

“We want to lend, but the regulators are flat-out telling us, ‘Get your capital up.’ Then there’s Congress telling you to lend it all out,” said Greg Melvin, a board member at FNB Corp., a Hermitage, Penn.-based bank that got $100 million in bailout money.

“Two arms of the government are saying exactly the opposite thing – it’s ridiculous,” added Melvin, who is also chief investment officer at investment firm C.S. McKee.

Money’s Available, Who Wants It?

Yet a third way of looking at the lending situation can be found in MidSouth Loses Would-Be Borrowers as TARP Fails With Louisianans.

C.R. “Rusty” Cloutier of MidSouth Bank wants to heed President Barack Obama’s call to lend money. It’s his customers who aren’t paying attention. Cloutier, chief executive officer of MidSouth Bancorp Inc. in Lafayette, Louisiana, received a $20 million cash infusion from the U.S. government on Jan. 9 and instructed loan officers to line up borrowers. Then he went on the road to make personal appeals at 14 town hall meetings.

“What we want to do is make people aware we have $250 million to lend,” Cloutier said Jan. 28 at the branch in downtown Lafayette. The 20 or so in the audience were outnumbered by bank employees handing out cookies and bottled water. Nobody asked for an application.

For now, many customers are sitting tight, said Curtis Hage, CEO of closely held Home Federal Bank of Sioux Falls, South Dakota, which received $25 million of TARP money. “We’re not going to put our balance sheet more at risk for the sake of public policy,” Hage said.

“If people thought the government would give banks money and they would turn around and leverage that and lend it, that’s not the way it works,” said Robert E. Litan, a senior fellow in economic studies at the Brookings Institution in Washington.

Attitudes Rule

The efforts by president Obama, Treasury Secretary Geithner, Congressman Barney Frank, and others to “unthaw credit” are seriously misguided.

Most of the big banks are severely undercapitalized and should not lend more even if they wanted to. There are some well capitalized banks that want to lend, however, there are few credit worthy borrowers. And the final piece of the puzzle is credit worthy borrowers for the most part, simply do not want to borrow.

Attitudes of lenders and would-be borrowers have both changed.

The reason is simple: It makes no sense to borrow in a deflationary environment where asset prices are falling and there are few jobs to be found. Yet the plan in Congress, and that of Geithner as well, amounts to telling banks to have their cake and lend it too. Clearly the policy is doomed from the start.

Mike “Mish” Shedlock
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