Time to lend

Our view: Banks that received bailout funds are not doing enough to help stem the recession

December 16, 2008

The Federal Reserve is expected to take steps today aimed at persuading banks that have received more than $250 billion in bailout funds to begin recycling more of that money back into the economy. But the signs are not hopeful.

Economists expect the central bank to lower the cost of borrowing money from the government overnight by at least a half-percentage point to just 0.5 percent. But the Fed has reduced this rate time and again, from 4.25 percent to 1 percent since September 2007, and still the recession deepens.

When Treasury Secretary Henry Paulson pitched his bank lending plan to Congress and the country, the idea was that the federal investments would lead to increased lending that would stabilize markets and take the edge off the economic decline. But bankers who received the aid seem to be in no hurry to make loans. Instead, they are using some of it to buy other healthy banks and to buttress their capital. Some bankers say they aren't making loans because it's hard to determine who is a safe borrower in the current economic circumstances.

There is some justice to the bankers' caution, particularly when it comes to assessing the health of other financial institutions damaged by reckless investments. But there is no legal requirement that the banks do what Mr. Paulson intended, and bankers feel free to do what they like with the bailout money.

Before any more bailout cash is distributed, Congress should hold hearings on the Treasury Department's management of the crisis so far. Current Treasury and Fed officials tapped by President-elect Barack Obama to lead his economic team should receive particular scrutiny. Lawmakers also should receive adequate guarantees that the banks that next receive bailout money use the funds to help otherwise healthy businesses, large and small, get the credit they need.

A culture of greed helped to set the stage for the current crisis. The goal for America's bankers now should be to invest prudently as partners to business, not to enrich themselves.

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