Where's the Money for Lending?

Where's the Money for Lending?

By Ed Koch - February 11, 2009

This week, the two men in charge of addressing the country's economic problems, President Barack Obama and Secretary of the Treasury, Timothy F. Geithner, presented their views; the President at a press conference, and the Secretary through a statement without questions from the press.

The President displayed a total grasp of the issues facing the country and gave an overarching vision of what had to be done. I found the President to be very convincing. As for the Secretary of the Treasury, his remarks reinforced the President's statement that we could be facing a catastrophe if we did not take massive efforts to deal with the crisis, and that the President was prepared to take whatever measures were required to prevent a repeat of the Great Depression of the 1930s. Regrettably, Timothy Geithner failed to provide necessary details. The major detail omitted was the answer to the question that many of us have asked over an extended period of time which is, will the commercial banks of the United States be mandated to lend money to creditworthy applicants, which they are currently not doing.

A little history: We were told by Bush's Treasury Secretary Hank Paulson that liquidity - the availability of credit - was our greatest financial problem and our greatest failing. He terrified Congress into voting for his plan, which the House first rejected, by telling us that unless the plan was accepted, we would have an economic debacle comparable to the Great Depression of the 1930s.

Six weeks later, after his $700 billion bailout plan was approved, Paulson told us that his original plan to buy up "toxic assets" was no longer the way to go, and he simply shoveled out money to the extent of nearly half of the appropriated funds -- $350 billion -- which Congress authorized him to do, leaving the balance for the new Obama administration to dispense. Those lending institutions have not resumed lending. Instead, they have used the tax dollars they received to increase their capitalization, to buy up other lending institutions, provide dividends to stockholders and pay excessive compensation and bonuses to their officers and senior employees, notwithstanding their past failures.

On February 10th, The New York Times, undoubtedly having the Geithner speech before it was delivered, analyzed the forthcoming remarks. On the issue of mandating liquidity and requiring the banks to lend appropriately, The Times' reporters, Stephen Labaton and Edmund L. Andrews, wrote: "Finally, while the administration will urge banks to increase their lending, and possibly provide some incentives, it will not dictate to the banks how they should spend the billions of dollars in new government money."

I hope the reporters are wrong. I fear they are right.

By letter dated October 9, 2008, I asked both Secretary Paulson and Chairman of the Federal Reserve Ben Bernanke why they didn't require banks receiving federal bailout funds to lend money to creditworthy applicants. Secretary Paulson did not respond to my inquiry. As for Chairman Bernanke, I found his response unconvincing. He wrote, "requiring directly that banks extend specified amounts of credit to creditworthy borrowers would entail many complications...In addition, because of the very large number of banking institutions in the country - more than 8,000 - administering such a program would be extremely resource intensive."

I had hoped Secretary Geithner would have told the American people that he was, at the very least, going to mandate that banks lining up to receive the additional $350 billion in federal bailout would be required to make those and other monies available for lending. He did not, and we will have to wait for future pronouncements from him on this subject.

This country is reeling and writhing in great pain. All that people want to talk about is their lost savings, e.g., in the stock market, 401ks, pensions, and their fear of losing their jobs, or their having been laid off.

Fear is everywhere. Remember what FDR said in his first inaugural address, "The only thing we have to fear is fear itself." President Obama will have to address that issue.

The President is entitled to the support of those Americans who voted for him and those who did not, but want him to succeed, it being in the interest of all of us that he do so. When he was campaigning for president, he used words to the effect that there is no Democratic America; there is no Republican America; there is only the United States of America. Recognizing that we are in great peril economically, it is clearly in the best interests of all of us that we work together.

The reaction of the stock market to the Geithner speech, hopefully not also to the President's, was a 355-point drop at the end of the day.

Ed Koch is the former Mayor of New York City.

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