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    UK foreshadows political future for US banks

    07/27/2009

    The <a href="http://news.bbc.co.uk/2/hi/business/8169225.stm" target="_blank">BBC is reporting</a> that Alistair Darling, the Chancellor of the Exchequer (roughly equivalent to our Treasury Secretary), is interested in questioning banks over whether their interest rates for small business loans and mortgages are too high.

    According to the BBC article,

    <blockquote>Mr Darling's comments come after a report by financial website Moneyfacts said banks had increased the interest rates they charge for personal mortgages nearly fourfold in recent months, despite the base rate remaining at a record low of 0.5%.

    Angela Knight, the chief executive of the British Bankers' Association (BSA), said banks had to pay a lot more than 0.5% for the funds they themselves borrowed in the wholesale money markets, and they had to pass this on to customers....

    However, Stephen Alambritis, chief spokesman for the Federation of Small Businesses, said the chancellor was "quite right to haul in the banks".

    "It is hugely important that Mr Darling keeps tabs on the banks to ensure they are lending money to firms, and at fair rates. Firms need to be able to reap the benefits of the historically low base rate," he said. </blockquote>

    We've already heard some of this kind of stuff from Barney Frank and friends, but prepare for it to get much worse, not least because the TARP Inspector General, Neil Barofsky, recently said that <a href="http://money.cnn.com/2009/07/21/news/economy/TARP_report/index.htm?secti..." target="_blank">there's no way to know what banks have done</a> with their bailout funds.

    What the politicians forget is that banking is an extremely competitive industry.  If interest rates seem stubbornly high for loans, the reason is simple: The perceived risks to lenders remain stubbornly high.

    Not only is it perfectly rational for a bank to worry about being paid back on a business loan or a mortgage in the current situation, but it's also perfectly rational to wonder whether government will compound the problem, such as by allowing judges to alter the principal amounts due on mortgages.

    Think about it another way:  Let's say that in 2004 you had some extra cash lying around that you were willing to lend.  Someone asked you for a loan to buy a house and you offered him a loan at 8% based on what you knew of his employment, the housing market at the time, etc.  Now what if the same person came to you asking for the same loan for the same house (and let's assume that in that neighborhood, prices are now roughly where they were in 2004)?  Would you still offer that loan at 8%?  Of course not (if you're sane.)  The rate would be higher to compensate for a myriad of additional risks, regardless of the so-called lower interest rate environment.

    Mr. Darling said that the UK government didn't bail out banks "out of some charitable act". But that's exactly what they did if the intention of the bailout was to get banks to lend money at rates which don't compensate them for the risk they're taking. (The charity, in that case, is to potential borrowers, not the banks.  Though even that analogy isn't quite right because it's only liberals who believe that if A steals B's wallet and gives most of the money to C then A has been charitable rather than a criminal.)  Of course, they also did it out of typical left-wing economic and political idiocy, thinking that they would be able to buy votes the way they always do. But this time it's not going to work because "public choice" economics and the ability of politicians to get away with spending a lot of money to provide a benefit to a narrow set of people is based on the cost to the broad majority of taxpayers being too low for them to notice or care.

    In the US, the Obama Administration is obviously saddling us and our children with new debt that's as great as the total debt from the time of the nation's founding until the time of Obama's inauguration -- including the disastrous spending of George W. Bush.  Even the usually unaware average American voter, particularly the average American Democrat, will not look kindly on what Tom Coburn accurately termed "Generational Theft". (I think John McCain stole the term from Coburn, but if I got that backwards, I apologize to Senator McCain.)

    Some more from the BBC article:

    <blockquote>"The public will not understand it if they [the banks] don't seem to be doing their part," he told the BBC's Andrew Marr Show.

    "I want them to rebuild their balance sheets... but at the same time, because of the particular circumstances we're in now, because of the fact we've got this recession, we also need them to lend money," said Mr Darling. </blockquote>

    Allow me to translate what Darling really means:

    If the banks don't go out and lend money at lower rates, regardless of the business case for those loans or those rates, we will pillory them in public until they do. After all, I didn't divert billions of dollars of taxpayer money to those banks just to help my golf buddies (or at least not as far as the public knows.)  Don't they realize that my political needs trump their fiduciary responsibilities; after all that <i>was</i> in the fine print of the "loan" documentation we made them sign.

    Can't you just hear Tim "the software made me do it" Geithner saying the same thing, flanked by Barney Frank, Chris Dodd, and the other scoundrels who have primary responsibility for the original mess?

    Chancellor Darling's words will with almost 100% certainty be parroted by Obama-loving bureaucrats and Democratic politicians in coming months as any so-called recovery fails to reduce unemployment and the high unemployment rates continue to dent Democrats' standing in public opinion.  It's the necessary outcome of letting politicians get their stinking claws into the economic body of our nation.