Does the Geithner Bank Plan Encourage More Bad Loans?

Simon Johnson at The Baseline Scenario today, ponders expectations of the Geithner bank plan. "Listening carefully to the messaging from the top, you are probably hoping for an increase in bank lending.

"...over the past few weeks, Congressional leaders have repeatedly insisted that, going forward, banks that receive government support should increase their lending," Johnson writes. Banks, in tern, have been rushing to explain why lending is down or boasting of modest loan increases. The point is lending will be the metric by which the bank bailout is judged. But Johnson argues that this is the wrong way to measure success. He writes that if legislators "mandate that lending must increase—or that loans must be made to particular categories of borrowers, such as small business or housing—that would be a recipe for more bad loans and further damage to the banking system (and more costs for you, the taxpayer.)  It would also lead to corruption, scandal, and reform fatigue." The Geithner plan may work, Johnson concludes, "but let’s see the details before we take a more definite view on that."


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