Why Easing Bank Rules Won't Prime The Pump

Search deep into Bill Clinton's psyche, where the Baptist spirituals boom and Elvis lives on, and you'll find a streak of Southern populism that colors his views on banks and credit. Like a lot of Dixie politicians, Clinton believes that many deserving folks--especially aspiring entrepreneurs--are routinely denied loans by flinty-eyed bankers.

As President, Clinton would like to do something about that. At his December economic summit in Little Rock, he startled some listeners by remarking that his proposed $20 billion to $30 billion first-year stimulus plan "was peanuts compared with increasing bank loans," a lending spurt that Clintonites term a "freebie."

The idea is simple--but then so was the Laffer Curve. If financial regulations are eased and bankers respond by boosting lending a mere 4%, that could send $86 billion surging through the economy. That's free stimulus because it wouldn't add to the budget deficit.

ELECTORAL EARFUL. The problems will start when the new President tries to turn this goal into reality. True, Clinton has a silver jawbone. But regulators and lawmakers, who still bear the scars of the thrift meltdown, are in no mood to weaken rules to satisfy a new President's desire for easy money.

In any case, the economic punch of the regulatory revisions the Clintonites are weighing will be far less than the meganumber floated at the summit. With some determined arm-twisting, the Administration would be lucky to wheedle $25 billion in new stimulus, estimates dri/McGraw-Hill economist David A. Wyss. That sum is "not trivial," Wyss notes, but as a spark plug for a $6 trillion economy, it's "not significant."

These reservations matter little to Clinton, who got an earful about a credit crunch in his months on the campaign trail. Actually, many economists think that stagnant bank lending is the result of a drop in demand--not supply. But even regulators concede there may be some biases in the system against commercial lending, especially to small businesses. Bankers fear examiners may question collateral backing commercial loans and demand write-downs. One Clinton transition staffer says the new Administration may urge examiners to ease stringent standards for loan evaluations. But the Bush Administration tried that a year ago, to no avail. Fact is, examiners now fear getting hauled before Congress for laxness more than they worry about Administration blasts for being too tough.

GUESSTIMATE. Clinton also may try to lighten some paperwork rules and shrink capital requirements for small-business loans. Some regulatory streamlining wouldn't be controversial. For instance, banks must go through the same proceedings for closing automated-teller machines as for shutting down a branch. Yet Federal Reserve officials and lawmakers oppose weakening capital requirements on the grounds that such laxity led to the excesses of the go-go Eighties. Any regulatory overhaul should contain "a firm commitment to maintain adequate capital standards on risky lending," insists Federal Reserve Vice-Chairman David W. Mullins Jr.

Even if a raft of changes go through, they're unlikely to prime the pump as much as Clinton hopes. American Bankers Assn. President William Brandon, who floated the $86 billion figure in Little Rock, concedes he had little economic basis for it. He simply thought a 4% rise in lending sounded reasonable and worked backward from there. Whatever the real figure is, some of it might go to refinancing existing loans, and some would merely replace other sources of funds. That would make Clinton's lending gusher more of a trickle. The lesson for Clinton seems clear: When it comes to bold talk of a lending "freebie," you get pretty much what you pay for.

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