Banks aren't lending

Politicians are agonizing over the fact that banks are not using taxpayer funds (bailout money) to increase lending. If they don't understand what is going on, then they are showing greater than usual stupidity. If they do know what is going on and are posturing - again - it only shows that hypocrisy is a critical part of the foundation of a political career.

Here is what is really happening. Banks indulged themselves with years of promiscuous lending to people, and businesses, whose cash flow, and therefore ability to repay, was doubtful. They could manage this magic because they could package the loans into strange and complex securities that were sold to investors whose greed greatly exceed prudence. Having done so, they could declare profits.

Unfortunately, these banks then took the next steps to disaster. They loaned money to these investors and, even worse, bought many of the toxic securities based on worthless loans. The result was, and continues to be, vast losses.

Now investors are missing, as they contemplate their losses, and bank loans can no longer be unloaded. Since banks have to keep these loans, they are the ones who will suffer if the borrowers default. Not surprisingly, they are taking much more care about their lending decisions.

If politicians are surprised by the actions - or rather non-actions - of banks, they should contemplate this question. Would you lend your own money to someone who is unlikely to repay you?