We talked a little last week about how Britain bailed out several large banks and, in the process, took large equity positions in them. Now the U.S. is looking to do the same thing. In the latest turn of events, though, Britain is exercising their newfound power in these companies by forcing them to increase their level of lending. In fact, these banks are being required to meet or exceed their 2007 lending level for the next three years, according to Bloomberg. To give you an idea of how far lending has fallen this year, the amount of new mortgages created this August was one third the amount created in August 2007, according to Bloomberg. Along with the new lending requirements, these banks will be required to cut board level bonuses for the year as well.
This is an interesting strategy and you can bet the U.S. is watching closely. The main problem with the U.S. strategy is that it will not guarantee that banks are going to start lending again, and if they don’t, then all of the new measures would have been taken in vain. Our economy in its present form cannot function without credit, and right now it just isn’t available. The British have the same problem that we do and they decided to force the issue now that they have control over the banks.
The U.S. has control over Fannie Mae and Freddie Mac, so conceivably they should already be able to pump up mortgage originations just by making some adjustments there. Getting desperately needed funds to small businesses is a little more difficult, but they could utilize the SBA and make those loans easier to get. Forcing banks to lend more, though, would definitely jumpstart things. It will be interesting to see how the British plan works out, and whether other countries, including the U.S., follow suit. I definitely see why the British are taking these steps, but I also see the potential for it to backfire if things keep getting worse. After all, there is a reason why everyone is scared to death of lending money right now.