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