Obvious Banking Strategy is Obvious

In one of the week’s biggest “no kidding?” moments, Federal Reserve Chairman Ben Bernanke said that, “Banks should make loans to creditworthy borrowers.”

Well, duh.

Credit is based on risk. Mortgages and loans, for example, are only supposed to be given to people who seem responsible enough to pay back that money; then the banks make money off of the interest. It only makes sense for banks to loan money to those with good enough credit.

I have nothing against the Fed’s Ben Bernanke. In fact, I think he is doing a wonderful job. However, you would think that non-faulty loan lending would be second nature after the recent financial meltdown. As I described in an earlier blog, lending subprime mortgages led to the current financial mess we are in right now.

On the other hand, if banks lend money to those who are more liable, they inherently get more business. This will ultimately lead banks to a better foundation during this financial recovery. Such actions would free up credit, which is currently hurting small businesses who rely on a solid credit flow.

However, at what cost would such lending occur? Could lax standards lead to another recession? Surely.

So in my opinion, banks should make loans, but by no means should they walk the tight rope. The economy, particularly the stock market, is incredibly sensitive at the moment. This sensitivity of the stock market is shown by its volatility, and its tendency to fall at the slightest hint of bad news.

In short, banks cannot afford to make the same mistakes they have made in this decade. As I described in an earlier blog post, faulty mortgage lending practices led to risky assets. When those assets did not pay back, the housing market began to crumble. At the end of the day, neither the banks nor the housing industry had any money. This led to an insane credit crunch that caused small businesses to scale back its employees. At the end of this fantastic roller coaster, we ended up in an economic recession.

As always, there are several pros and cons to walking the tightrope, to be sure. However, given the volatility of the market (as seen today in the stock market), it might be wiser to walk on the thicker side of that tightrope.

Chris Buchheit

Chris Buchheit

Chris Buchheit was born under the hot Floridian sun during some year in the 1980s. There he studied school matters until moving to North Carolina in 1999. Possibly due to the fact that his mom had enough of him being inside all the time, he quickly got involved in community affairs via the Boy Scouts of America, where he learned the values of citizenship, morality, duty to God and country, and that the biggest kids get to boss around the smaller ones. Chris attained the rank of Eagle Scout in 2004, and still values the rank as one of his proudest achievements. Beginning in 2006, Chris began attending the University of North Carolina at Chapel Hill, where he quickly learned the value of basketball and poplar trees. Since attending UNC, Chris has been double majoring in Asian Studies, with a concentration in Chinese, and Political Science. When he isn’t slaving over his honors thesis, looking up a bunch of Chinese Characters, volunteering, or mindlessly browsing the same websites over and over, Chris enjoys writing short stories and novels. Much to his roommates’ annoyance, he also spends his free time learning to play the guitar. Above all else, though, Chris values God, his family, and his friends. For the future, Chris plans to apply to Georgetown to further his studies in Political Science, hopefully with a concentration on China. Pending acceptance into Georgetown, Chris would like to study while gaining professional experience in a government job in Washington DC.
Chris Buchheit

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