Substitute Bridges

Binyamin Appelbaum at the Washington Post should get an award for writing a story so much at odds with the conventional wisdom.

Banks throughout the United States carried on with the business of
making loans yesterday even as federal officials warned again that
their industry is on the verge of collapse, suggesting that the
overheated language on Capitol Hill may not reflect the reality on many Main Streets.

…. many smaller banks said they were actually benefiting from the problems on Wall Street. Deposits are flowing in as customers flee riskier investments, and well-qualified borrowers are lining up for loans.

"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank
in Cherry Hill, N.J. "We’re doing fine. There are 9,000 financial
institutions out there, and most of them are small and most of them are
doing fine."

Dunkelberg, a professor of economics at Temple University and chief economist for the National Federation of Independent Business,
added that a recent survey of that group’s members found that only 2
percent said getting a bank loan was the great challenge facing their

Even some of the nation’s largest banks, which have pushed hard for a
federal bailout, deny that the current situation is forcing them to
reduce lending. "The strength of our core businesses, capital and
liquidity are enabling us to continue to support our customers," Bank of America, the nation’s largest bank, said in a statement. It added, however, that the bailout plan would allow more lending.

The most recent Federal Reserve
data show that the volume of outstanding bank loans declined 0.5
percent from the last week of August to the second week of September,
though it was up more than 6 percent from the corresponding time last

The article goes on to discuss some of the real problems in the industry and do bear in mind that the majority of deposits are in big banks.  Nevertheless, I found the perspective valuable.  As I have argued, we should be paying more attention to the institutions that are doing well and can serve as substitute bridges to keep credit flowing to firms with valuable projects.  I have also advocated increasing savings with a temporary savings stimulus package – this could involve expanding and making contributions to Roth IRAs tax deductible or something like promising no taxes on CD investments of 1 year maturity or longer that are made in the next year .


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