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Home Publications Blogs Beat the Press Blue Dog Pork and the Tall Tale of Capital Constrained Banks

Blue Dog Pork and the Tall Tale of Capital Constrained Banks

Wednesday, 23 June 2010 03:36

The Wall Street Journal reported on efforts by Arkansas Senator Blanche Lincoln to secure a provision in the financial reform bill that will aid an Arkansas bank owned by the Walton family (yes, the Wal-Mart gang). The provision would exempt banks with assets of less than $15 billion from meeting a more stringent capital requirement, replacing the $10 billion cutoff in the bills approved by the House and Senate.

The article cites Lincoln's rationale for this change. She claimed that the tighter capital rules "...would hinder their [banks] ability to generate lending for consumers and businesses at a time when access to credit is already difficult to come by."

In fact, there is little evidence that capital constraints on banks are affecting the ability of consumers or businesses to raise capital at present, as Lincoln implied. There are many banks that did not over-leverage themselves during the run-up of the housing bubble. These banks now have plenty capital to lend. However, there is no evidence that they are taking advantage of the weakness of their competitors by stepping up lending. This implies that capital constraints are not a major factor in the current downturn.

This is worth noting since the media have often been willing to accept, at face value, the rationales given by Blue Dog Democrats such as Lincoln for actions that seem like old-fashioned pork-barrel politics. As another example, last week the Washington Post reported on Indiana Senator Evan Bayh's efforts to save the fund manager's tax subsidy. It asserted that he was motivated by a concern about helping growing businesses, as opposed to the more obvious explanation - that he simply wanted to help wealthy people who supported his political ambitions.

While this WSJ article explores the obvious political motivation for Lincoln's actions, it does not note that her rationale makes no sense. The media should subject the pork pushed for wealthy supporters by Blue Dog Democrats to every bit as much scrutiny as they do the measures promoted for the benefit of other constituencies.

Comments (5)Add Comment
written by izzatzo, June 23, 2010 7:08
If seat belts are required on cars there will be less cars at a time when people need their cars most. Seat belts are expensive and will drive up the cost of cars and reduce employment by car manufacturers while forcing people back to riding horses.

Just because car passengers are careening through windshields and coming out the other side in more pieces than one is not a reason to require seat belts. In fact if seat belts are required they will create a moral hazard where drivers actually drive faster and cause just as many accidents, the same way construction workers required to wear hard hats bang their heads into hard things until they get a concussion that would never happen without hard hats.

Defeat financial reform now. It's worse than seat belts. If the finance industry produces only one more financial job, one more house financed on credit, one more small business to survive on loans, it will be worth it to risk another $8T housing bubble. Stop socialism now. Drive free or die.
bigger is better
written by frankenduf, June 23, 2010 8:55
not to mention the exemption is irrational- small banks can fail just like big banks- wonder if lincoln ever heard of the great depression (not THE lincoln)
written by ed hardy, July 25, 2010 8:44
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.