FDIC: How not to make banks lend.

Among the complaints of regulators & politicians regarding bailouts to date is that banks are not lending. I've already noted some reasons why not -- e.g., paying interest on excess reserves.

But the feds keep shooting their own feet. Another example is the FDIC guarantying bonds of anything that vaguely resembles a bank, for example, Goldman Sachs and John Deere.

If the FDIC (et al) wants them to on-lend the money raised by guaranteed bonds, then they should restrict the gtys to (quasi) "covered bonds", bonds backed by newly originated consumer loans of the type formerly securitized (but with strict origination standards). Granted, the U.S. legal & regulatory structure has not duplicated the European (primarily German) regime for covered bonds ... but then we've socialized the U.S. banking system and laid the foundations for "industrial policy" (the polite name for the economic model of 'national socialism'), and etc., without debate or a vote. Creating an ad-hoc covered bond regime is small beer by comparison.

JRB

12/16/08