Obama pushes bankers to increase lending to boost economy

Economists who believe the government should actively manage the economy to buffer the depth and length of economic downturns say that expansionary monetary policy is appropriate for combating a recession. This is accomplished when commercial banks increase the amount of money created when they increase their lending. More loans encourage increased spending which is turn increases the aggregate demand for newly produced goods and services and boosts employment as businesses increase output.

U.S. President Barack Obama chastised commercial banks for failing to lend sufficient funds to the public despite efforts by the Federal Reserve to lower interest rates and encourage more loans.

In the December 14, 2009 McClatchy article "Obama pushes bankers to increase lending to boost economy," Steven Thomma explains why President Obama wants bankers to increase loans.

WASHINGTON — President Barack Obama gave the nation's top bankers an earful Monday, telling them in no uncertain terms that it's time for them to start lending again to help boost the economy after being bailed out themselves by the nation's taxpayers.

Although aides called the meeting "positive and constructive," there was little doubt that Obama summoned the bankers to the White House for a high-profile dressing down, pitting the power of the presidential bully pulpit against them.

Beyond pressing them to pump more cash into the economy through new loans, he also told them he'll fight them and their lobbyists if they try to block tough new regulation of their industry, and that they need to do more to rein in exorbitant pay.

"My main message in today's meeting was very simple: that America's banks received extraordinary assistance from American taxpayers to rebuild their industry and now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy," the president said after the meeting.

He acknowledged that some of the drop in lending is due to banks and regulators not wanting to repeat the kinds of high-risk loans that helped cause the financial collapse. He also noted that regulators are requiring banks to increase the amount of cash they keep in reserve.

"No one wants banks making the kinds of risky loans that got us into this situation in the first place," he said.

Nonetheless, he pressed them to "explore every responsible way" to boost lending, which has dropped for five consecutive quarters.

When bankers told Obama they were taking a second look at some potential loans to small businesses, he urged them to go farther. "Go back and take a third and fourth look," he said.

Richard Davis , the chairman and CEO of US Bancorp , said outside the White House that bankers weren't hoarding cash just to boost earnings.

The problem, he said, is that many Americans and businesses are less creditworthy than they were before the recession.

"You don't want us to make loans that aren't strong and well suited" to the borrower, he said.

Republicans called it hypocritical for Obama to press bankers to make more loans.

"It's not every day the leader of the free world blames you for a problem and then tells you to do the exact same thing that caused the problem," said Rep. Tom Price , R- Ga. , the chairman of the Republican Study Committee.

Obama also lobbied for his proposed sweeping overhaul of the nation's financial regulations, challenging the bankers to justify their public support for change in light of their intensive lobbying in Congress to defeat his proposals.

"The industry has lobbied vigorously against some of them, some of these reforms on Capitol Hill ," the president said.

"I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people. If they wish to fight common-sense consumer protections, that's a fight I'm more than willing to have."

Obama also noted that many banks have shifted from paying bonuses in cash to paying them in stock that's available only after several years. "But," he said, "they certainly could be doing more on this front as well."

The group included:
— Ken Chenault , the president and CEO of American Express .
— Davis of US Bancorp .
— Jamie Dimon , the chairman and CEO of JPMorgan Chase .
— Richard Fairbank , the chairman and CEO of Capital One.
— Bob Kelly , the chairman and CEO of Bank of New York Mellon .
— Ken Lewis , the president and CEO of Bank of America .
— Ron Logue , the chairman and CEO of State Street Bank .
— Gregory Palm , the executive vice president and chief counsel of Goldman Sachs .
— Jim Rohr , the chairman and CEO of PNC.
— John Stumpf , the president and CEO of Wells Fargo .

Some CEOs participated via conference call, unable to attend because of bad weather. They included Lloyd Blankfein , the chairman and CEO of Goldman Sachs , John Mack , the chairman and CEO of Morgan Stanley , and Dick Parsons , the chairman of Citigroup .

Government policies to reduce the severity of recessions and reverse economic declines

The government has two broad options for managing the overall economy: monetary policy and fiscal policy.

In the United States, expansionary monetary policy is the Federal Reserve system´s use of the money supply, interest rates, and the banking system to encourage commercial banks to lend more money to the public in the hope that this will increase overall spending on newly produced U.S. goods and services. The collapse of credit markets in 2008 reduced most types of lending and will require a restoration of confidence (perhaps by improved oversight and regulation) before monetary policy can assist in economy recovery (by lending more money to encourage more overall spending).

Fiscal policy is taxation and government spending. The logic of using tax cuts to counter a recession is that if the government takes less money from individuals and businesses, they will have more money to spend. Remember the cause of the U.S. economic downturn is insufficient overall spending on newly produced American goods and services. In this regard, tax cuts are essentially identical to the federal government handing out money. The goal is to put more money in the hands of individuals and businesses in the hope that they will spend it on products that are newly made by U.S. workers. Many debates about tax cuts are essentially decisions about to whom the government should be giving money. Tax cuts and other increases in government handouts are relatively quick ways to inject purchasing power into the economy and increase the potential for increases in aggregate demand. There is no way to guarantee that these income supplements will result in purchases of newly made U.S. products, however. For example, much of the increased disposable income caused by the tax cuts of 2001 and 2003 resulted in paying down consumer debt rather than increased consumer spending. And even when spent, if the products purchased are not American-made there is limited benefit to the U.S. economy and its workers. Even though tax cuts or other government handouts can be done quickly, they may be poor choices if they do not significantly increase overall spending on newly produced U.S. goods and services.

An alternative fiscal policy to counteract economic declines is an increase in government purchases. The primary benefit of this choice is that government procurement policies can ensure that this increased spending goes to U.S. businesses that employ American workers. A difficulty with this approach, however, is that it may be difficult to spend sufficient quantities of money quickly enough on projects of long-term benefit. Infrastructure projects can take long periods of time to complete and thus may not inject additional income into the economy quickly enough. Similar arguments can be made for proposals to improve energy efficiency, develop alternative fuel sources, or reform the health care industry. Projects that can be quickly implemented, however, may be of questionable long-term benefit. Yet, if the result is increased purchases of new products made by U.S. workers and suppliers, they still may be preferable to tax cuts (if the tax cuts are used to pay down debt or buy used or foreign products).

Tax cuts and increases in government spending both increase budget deficits and the national debt. Criticisms of stimulus proposals on the basis of reluctance to increase public borrowing apply equally to tax reductions and increased spending programs. Running deficits is not always bad, however. For example, many students borrow substantial sums of money in order to attend college. This indebtedness is easily justified, however, because it leads to a college degree that increases earnings potential for the remainder of one´s career. Similarly, it can be reasonable for a society to borrow money from future generations if the funds are spent wisely on things that increase the productive ability of the economy and improve future living standards. Future generations may not mind if money is borrowed from them to develop alternative energy sources that result in less environmental degradation. It is less arguable to accumulate massive public debt based on willful ignorance, selfishness, or simple reluctance to pay one´s way. The 2001 and 2003 tax cuts were the first wartime tax decreases in U.S. history. Previous generations were willing to make sacrifices for causes they believed in.

Tax decreases are popular and are undoubtedly of short-term benefit to those allowed to pay less in tax. The dramatic increases in U.S. budget deficits and public debt since 1980 have been of great short-term benefit to many sectors of the economy. But they have done substantial harm to the long-term benefit of the U.S. and global economies (for many of the reasons cited by critics of current stimulus proposals). It is akin to allowing large numbers of people to go to the mall, stuff shopping bags with items, and walk out without paying. It is of great short-term benefit to those who get away with it. But these strategies are not sustainable in the long-term. Selfish and misguided choices over the previous three decades have left American policymakers with few, if any, desirable options. The more important question may be how long will it take before U.S. citizens become willing to make the sacrifices and tough choices necessary to correct the abuses of the past and demand more honest, reasoned leadership.

See also "Recessions & Depressions: Questions & Answers."

How Monetary Policy Affects the Economy

How Monetary Policy Affects the Economy

Monetary policy is conducted in the United States by the Federal Reserve System (the Fed), which is the U.S. central bank. A central bank is an institution that oversees the banking system and regulates the quantity of money in an economy. The Fed influences the economy by changing the money supply and interest rates to either increase or decrease aggregate demand (AD), which is overall spending on newly produced goods and services. When the Federal Reserve conducts monetary policy, it may increase or decrease the money supply depending on the condition of the economy.

Expansionary monetary policy occurs when the Federal Reserve System induces commercial banks to increase the amount of money they create through loans. Thus, expansionary monetary policy increases the money supply. If the economy needs stimulation (e.g., to fight unemployment), then the Fed usually conducts expansionary monetary policy to increase the money supply, reduce interest rates, and encourage more consumption and investment spending. Low interest rates encourage households and businesses to borrow money. If they use this borrowed money to increase spending on consumer products (C) and investment (I) in capital equipment, inventories, and structures, then aggregate demand increases. Aggregate demand is composed of consumption spending (C), investment spending (I), government purchases (G), and net exports (X-M).


AD = C + I + G + X - M


Contractionary monetary policy occurs when the Federal Reserve System induces commercial banks to decrease the amount of money they create through loans. Thus, contractionary monetary policy decreases the money supply. If the economy needs dampening (e.g., to fight inflation), then the Fed usually conducts contractionary monetary policy to decrease the money supply, increase interest rates, and discourage consumption and investment spending. High interest rates discourage households and businesses from borrowing money. If higher interest costs reduce spending on consumer products (C) and investment (I) in capital equipment, inventories, and structures, then aggregate demand decreases.