October 27th, 2008
The double-barreled title deals with two aspects of the credit crisis, the uncertainty over whether banks will start lending out the billions governments have been giving them, and Allan Greenspan’s agonizing reappraisal of his personal role in the credit crisis.
Joe Nocera, in last Saturday’s New York Times raised the key question of whether the US banks that have been receiving billions of funding under the bailout package will hoard it, use it to acquire other banks, or actually lend it out. As can be expected of a Republican administration that is still philosophically non-interventionist, there is little desire to get involved in managing how banks run their business. Nocera notes that, in contrast, the British government is requiring that recipient banks resume lending.
Starting from first principles, there is a good case for government to seek commitments that banks will expand lending. First, if the banking system has now become, in essence, a public utility, then the government, as representative of the public, should have enhanced decision rights. Second, we’ve learned that a key reason that the stock market crash of 1929 evolved to the Great Depression of the Thirties is that governments permitted credit, aka among economists as the money supply, to collapse.
Looking ahead to the Obama Administration (and back to the Clinton Administration), here is a suggestion. The Clinton Administration had several successes in inducing high profile organizational commitments to actions in the public interest. Two that come to mind are Labor Secretary Reich’s initiative to get brand-name clothing lines to commit to a rejection of sweatshop production and procurement administrator Steve Kelman’s initiative to get government agencies to commit to the principles of procurement reform. These cases are obviously much less complex than the credit crisis, but I think the approach is transferable. Summon the bankers to the White House to a public conference to get some sort of commitment to principles regarding the expansion of credit.
In Canada one similar issue that has arisen was whether banks would reduce their lending rates commensurate with reductions in the government lending rate. The banks’ initial reluctance to follow led to public criticism which led to the banks to pass on the entire rate cut to borrowers. The overarching issue is similar: economic instability has necessarily made bankers’ decisions a public policy issue.
Finally, Allan Greenspan will be bringing his “mea culpa tour” to Toronto on Friday November 7, for an event billed as “an afternoon with Allan Greenspan.” I detect a few ironies. The “afternoon” is scheduled for noon to 2 p.m., ending early so the audience can return to their trading desks to close out the week. The sponsor is TD Canada Trust, which has distinguished itself for its shrewd avoidance of subprime loans. Finally, the ticket price is $325 or $450. Given that he has now recognized the error of his ways, it seems only appropriate that Greenspan do the right thing and donate the entire speaker’s fee to the United Way of Greater Cleveland or some similar organization helping repair the devastating economic and personal damage his decisions have unleashed.