Checks (as in Blank) & Balances (as in Zero)

For some time now, institutions have been taking losses on their holdings of residential mortgages and securities and on their residential construction and development loans. However, as the recession has deepened, banks are now experiencing rising credit problems in their nonresidential real estate loan portfolios. The only way to deal with the coming problems is to build up capital reserves - and that can't be done if banks are making loans.

If banks cannot identify specific problematic loans, but know they are likely to come, there is no way to measure the size and scope of the problem for any individual bank. If government insists that they loan the capital they are receiving from programs like TARP directly to the consumer, there is no way a bank can ensure it has enough capital reserved once bad commercial real estate loans rear their ugly heads. If this happens, banks will fail.

The government realizes this. They also realize that this would make everything much worse than it already is. So what is their answer?

Last November, the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the Office of Thrift Supervision issued a joint statement to help banks and thrifts navigate these waters. The statement noted that "at this critical time, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met."

The real message?

Avoid "imprudent practices that would put your institutions at risk." But don't completely hunker down, just "resist extreme risk aversion, since it would undermine efforts to get the economy going again."

Translation: Lend to the well-capitalized guys who don't really need the money since there's less of a default risk.

So let's see of we have this straight. A flow chart that should look like this:

Taxpayers $$ --> Government --> Banks --> Consumers = Solution!!

Instead looks like this:

--->Taxpayers ---> Gov't ---> Banks --->