Fed Watch: Lowering the Bar

One more from Tim:

Lowering the Bar, by Tim Duy: From the terms of the Capital Assistance Program:

As part of the application process, banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity – specifically, to increase lending above levels relative to what would have been possible without government support. The Treasury Department will make these plans public when the bank receives the capital under the CAP. (italics added.)

This is refreshing; unlike the initial TARP program, Treasury is not giving the impression that banks will increase lending – only that lending will contract by less than otherwise expected, all else equal.  Avoidance of a absolute collapse seems to be a reasonable goal.  I would prefer that we moved to avoidance of the Japanese scenario as well, but perhaps I just need to learn to be happy with small steps.

Of course, I can’t see that it would be hard for the recipient bank to pick a safe baseline for lending in the absence of Treasury support (like zero).  Nor will it be easy to explain to the taxpayer that they should continue to expect lending to contract.  But at least we can say we were warned.

Originally published at the Economist’s View and reproduced here with the author’s permission.