Understanding Bank Lending and the Financial Crisis

Here's why you care: One of the premises we often here is that everything will be fine if banks start lending again. But, what if they really have been, and can only do so much. What then? That's the topic of the Wall Street Journal's Jon Hilsenrath's story today. He reports that two Harvard B-School economists (David Scharstein and Victoria Ivashina) took a close look at what banks are up to and concluded that in fact they are lending. Just not in the way you'd expect.

The upshot is this - back when times were REALLY GOOD money was flowing and companies were able to negotiate deals for essentially what are rainy day loans. Now it is a rainy day and the banks are contractually obligated to lend. The problem? Some of the companies would not be able to get loans today because they are not healthy, but because of the contracts were done a couple years ago the banks have to lend to them instead of the healthy companies looking for a loan now.

Read this story, it is well written and reported and Mr. Hilsenrath even gives layman explanations for the financial lingo not easily accessible to the non-MBA set. You can bet Capitol Hill, Wall Street and K Street are reading this piece today.