Banks: Lubricant or Just Another Industry?

Can we get this straight? Are banks the critical lubricant for the economy or just another industry? This week's Business Week provides a contrast worthy of those conflicting headlines about the same event the New Yorker used to run at the bottom of short columns. In an interview with Maria Bartiromo at the front of the magazine, Wells Fargo CEO Richard Kovacevich is quoted as saying that Treasury should support banks before other industries because "for every dollar you put in, institutions get to lever that 10 to 20 times in terms of the loans they can make." And "It's important to invest in the banks because banks are the grease that keeps the real economy moving." Yet 10 pages later, Business Week tells us that banks are saying they won't lend until 2010, and the government money flowing into them won't help. Kovacevich himself is quoted in this article as saying "lending won't start until everyone agrees the bottom has been reached," although to be fair, in the earlier article he says he hopes the bottom will be reached quickly.

Unless banks are going to lend with the government funds they're getting, they might as well get in line behind firms in the real economy, like autos, airlines, and manufacturing in general. Because if a bank doesn't lend, it's just another corporation, and not one producing real goods. While I'd like the banks' attitude to be different, I don't particularly blame the banks for this stance, especially those whose capital condition is somewhat shaky because of doubt about the actual value of the assets they are holding. As a fiduciary matter, if they're concerned about having enough capital to satisfy examiners as well as the market, that's probably the right stance.

No, the problem lies with the Treasury. As Kovacevich points out, a dollar of bank equity capital can be turned into $10 to $20 of loans. But it need not be levered up that much to be effective. If the Treasury were to say to the banks -it's not too late, as it appears no actual agreements have been signed-that for every dollar of equity we put in, you need to make $5 or $7 of loans, the banks would still be getting a good deal, would still be enhancing their equity position, and would, contrary to the current situation, actually be lubricating the economy. Any chance the Treasury will explain why this isn't a good idea? Or better yet, just adopt it.