Banks: Just say no

The federal government may have forced banks to accept capital infusions from the Treasury Department, but that doesn't mean the banks are obliged to start lending again. And so far, it appears as if they're not. Rather than lend, many banks, especially the healthier ones, would prefer to use the capital as a cushion against future writedowns. Should the government be in the business of making those decisions? Writing in the WSJ, William Poole, former CEO of the Federal Reserve Bank of St. Louis, says this raises all kinds of issues:

What if a courageous board of directors of one of the nine large banks doesn't agree to sell stock to the Treasury, despite the CEO's promise? After all, a board should be more than a rubber stamp for the CEO. What if a stockholder suit blocks a bank's participation? Then what? Would Treasury apply further turns of the extralegal screw to the recalcitrant bank? If a bank hangs tough, we have some very rough times immediately ahead. If no bank resists, we have some tough times ahead for the longer run, because, large bank or small, the federal government is now beginning to walk down the path of credit allocation.

Treasury Secretary Hank Paulson was quoted by Bloomberg on Tuesday as saying that "leaving businesses and consumers without access to financing is totally unacceptable." Actually, it is perfectly acceptable to leave certain businesses and consumers without access to credit. Everyone understands that we would be a lot better off today if the market had denied mortgage credit to many subprime borrowers. Can federal direction as to which businesses and which consumers banks must serve be far behind -- even if not from this Treasury Secretary, then from his successor, or from elsewhere in the federal government?