Monday, September 13, 2010
The New York Times, of all newspapers, ran an op-ed yesterday that argues that banks are not lending because regulators are so aggressively raising the capital requirements for lenders. It is very worth reading, especially if you want to see but one small example of new regulation stifling the recovery of the economy, a theme we have been harping on since the beginning of the administration.
Of course, one might reasonably argue that the financial crisis of 2008-09 revealed the need for much higher equity requirements for banks, and that international regulators are in general agreement to impose them. All perhaps true, but that does not change the point that the cost, at least in the next few years, is substantially slower economic growth and fewer opportunities for everybody.
Another cost is in the forced concentration of business to larger firms at the expense of smaller ones. Entrepreneurs, who often lack captial of their own, need access to capital and banks will not, can not, provide risk capital right now, and (despite the fact that risk capital is a great business for banks) the new Basel regulations will as they are implemented over the next eight years make that situation worse. As a result, large companies are in a much better position to buy small companies than entrepreneurs are and in my opinion that increasing concentration in our economy will prove to be a bad thing.
No one mentions that the FDIC refused to let new banks enter the market for the last 2 years. New banks would be well capitalized and able to offer good lenders money. But because new healthy banks have too many advantages over old dying banks, no new ones have been allowed.
I run a small professional services business, and my local bank will lend me as much money as I want. But I don't want any, because my business has dropped more than 30% in the past two years after almost a decade of double digit growth.
This idea that the economy will recover if only small businesses "could borrow" more money is crazy talk. The administration has it exactly backwards.