So the first tranche of TARP injections hasn’t exactly spurred lending, but then it wasn’t actually supposed to. It was all about plugging balance sheet holes (though it might not have accomplished that either). Still, there’s a strong belief among many that if only financial institutions were looser with the purse strings, the economy might heal again.
Obama’s econ adviser Larry Summers echoed this view on Meet The Press, and he basically said the solution was to just inject more capital into the banks that have already taken cash. For some context, host David Gregory is asking why, if the government owns so much of the banking system already, it can’t simply tell bank execs to lend more now:
MR. GREGORY: But it (government) has the ability to affect how much capital they keep on, on their balance sheets, it has the ability to say to them, “This is how you should operate.” And it could, in effect, make them lend if it wanted to.
DR. SUMMERS: Sure.
MR. GREGORY: No?
DR. SUMMERS: Sure it does. Who knows what it could do. It wouldn’t be…
MR. GREGORY: Right. But why not do that, if that’s the concern?
DR. SUMMERS: It wouldn’t be, it wouldn’t be responsible for an institution that can’t contain confidence, can’t maintain any confidence right now to raise its, raise its lending without having capital. Frankly…
MR. GREGORY: So they need more money.
DR. SUMMERS: …that’s why we need–frankly, that’s why there needs to be more capital in the system. That’s why this…
That seems pretty straightforward, right? Summers says that lending too much now would be irresponsible because banks need to maintain healthy capital ratios, but that by injecting more capital in the system, banks could lend again. Anyone have a different interpretation?
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