Monday, June 22, 2009

Eliminating Credit Spreads

The regulatory bill circulating through Congress would prohibit banks from charging different borrowers different interest rates. Bad creditors would pay the same rates as good creditors under the new world order proposed by the Obama Administration. How will banks react to this new rule?

If, as a lender, you cannot charge different rates to different folks why would you ever lend money to anyone but folks with very, very good credit. It wouldn't makes sense to lend money to anyone else, since you get no additional income from taking the additional risk.

Once again, the losers will be middle American borrowers without excellent credit standings. These folks will no longer be able to borrow from banks under the Administration's new rules. It would be a lot easier if the Administration would just pass a law saying that only rich people can borrow from banks. That is the effect of their proposed regulation. Why not just put it out there in bold print?

Eventually Congress will pass another law requiring banks to lend to poor credit risks, along the lines of the Community Reinvestment Act. Then banks will simply ration their loans to the politically favored groups and continue to eliminate all lending to politically disfavored groups.

As China moves toward capitalism, the Obama Administration moves capitalist America into state run banking, where only the rich and politically connected can obtain financing.

Political campaigns of the future will be campaigns directed at who will be favored by the lending policies of the state controlled (owned?) banks. As China moves away from state controlled bank lending and toward the free market allocation of lending, the US moves in the opposite direction. State managed commercial lending is the new Obama future for the US.

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