Banks are tightening lending standards:

Banks’ ‘Catatonic Fear’ Means Consumers Don’t Get TARP Relief

Jan. 5 (Bloomberg) — As the new owner of $172.5 billion of preferred shares and warrants in 208 U.S. financial institutions, the Treasury Department hasn’t succeeded in thawing frozen credit markets, leaving taxpayers propping up an industry that won’t lend to them.

But the reason for the lack of lending is that banks are tightening their standards.

In its most recent quarterly Senior Loan Officer Opinion Survey in October, the Fed reported that about 85 percent of U.S. banks said they had tightened standards on commercial and industrial loans to companies with more than $50 million in annual sales, up from 60 percent in July. Ninety-five percent said they increased the cost of those loans. About 70 percent said they made it more difficult to obtain prime mortgages, and almost 65 percent said they did the same for consumer loans.

I actually think that is a good thing long term. Otherwise, we would have a splurge of more spending, based on bad loans made to shaky borrowers. But then when some of those loans would go bad, we would be back in the soup, this time with no more bullets in the gun to deal with it.

But some people think the banks should be handing out money like welfare checks:

“We own them now, and we should use that to make sure they stop ripping us off,” said Gail Hillebrand, head of the financial-services campaign at Consumers Union, an advocacy group based in Yonkers, New York. “We shouldn’t allow banks to use the money to support things that hurt consumers and taxpayers. What we’re looking for is responsible behavior, not social benefits.”

Bank profits or returns on the government investments are secondary concerns, Hillebrand said.

However, that view is not accepted by all:

That view is opposed by free-market advocates such as Gary Becker, a professor of economics and sociology at the University of Chicago and a Nobel Prize winner, who says the primary aim of the government bailout should be a hasty withdrawal from investments that shouldn’t have been made in the first place.

“If you believe in a private-enterprise system, you use competition to control the banks, not a stakeholding,” Becker said. “It would be a grave mistake to use these private institutions for social goals.”