Finance

In Search Of A Goldilocks Banking System

1. When banks lend more, it helps the economy grow. Businesses can borrow money and hire more people.

2. When banks lend more, they take on more risk. If a significant chunk of borrowers don't pay back their loans, banks can go bust. When banks go bust, the economy suffers.

This tension was at the heart of yesterday's exchange between Fed Chairman Ben Bernanke and JPMorgan CEO Jamie Dimon.

Clearly, what you want is a Goldilocks banking system where banks are lending out just enough money to help businesses grow without making crazy loans and taking on excessive risk.

But it's not like you can plug the whole economy into some magic equation and get a simple answer for how much banks should be lending, and how much money they should hold in reserve as a safety cushion.

So there's a necessary tension between growth and safety. And over time, the pendulum tends to swing back and forth.

Dimon is arguing that the pendulum is swinging too far towards restricting lending, and that this will slow down economic growth and job creation. (Of course, banks make profits from lending out money. So it's in their financial interest to lend more.)

Bernanke says the first order of business is to minimize the risk of another financial crisis, but agrees that "it's probably going to take a little time to figure out ... where the cost [of new regulations] exceeds the benefit."

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