It is common knowledge now what ultimately brought about this current economic crisis. Banks lending standards became too lax, fueled by greed on the part of some and ignorance on the part of others. Loans were made to individuals to purchase houses beyond what they could possibly afford. After this was exposed by the melting down of the sub-prime mortgage market, the same lax standards that were applied in other areas (credit card, auto, and corporate loans) have led to more problems.
This should not be news to anyone anymore. So I am confused when the government says that banks are prolonging this crisis by refusing to lend money. At the beginning of the crisis, the banks were criticized heavily for their lending practices and were told that they should be more stringent. The public shook their collective fingers at them for allowing this to happen. Now, the same people are shaking their fingers once again, but for a different reason: NOT lending. In an evironment when there are becoming increasingly fewer "good" clients to lend to, banks are supposed to continue lending as if nothing is wrong.
So here is the Catch-22: Do the banks continue to lend money to less creditworthy clients, which will in turn lead to more write downs and less consumer confidence, or do banks increase lending standards and face public scrutiny by prolonging the crisis?
I agree that the taxpayer/government should have some say as to what the banks do with the money they have been handed, but is the solution to continue to repeat the same mistake that landed us here in the first place?
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