Posts Tagged ‘Federal Reserve’

Is The Fed Giving a Pass on Sovereign Debt?

Part of the role of the Federal Reserve (the Fed) is to provide oversight to their member banks.  Approximately one-third of all U.S. commercial banks are members of the Federal Reserve.  All national banks are required to be members, and certain state chartered banks can choose to become a member.

Fed oversight involves a variety of bank operations.  Recently, the Fed conducted stress tests of the large national banks.  The purpose was to assess the strength of the bank and their ability to withstand another major economic calamity, like what happened throughout 2008.  One of their goals is preventing any bank from becoming “too big to fail.”

Bank capital is one of the measures regulators use to measure bank strength and stability.  Bank capital requirements are intended to guarantee a bank is able to withstand certain losses in its investment and loan portfolio and still meet the withdrawal demands of its depositors.

The following article describes a Citigroup analysis which discovered a recent trend in the U.S. and Europe regarding bank capital requirements and sovereign debt.  The Citigroup study revealed that bank regulators at the Fed and their European counterparts were not counting sovereign debt as part of the bank capital requirements.  The Citigroup analysts concluded the primary reason for excluding the sovereign debt was to help guarantee a market for sovereign bonds.

The United States and European countries are currently experiencing huge budget deficits.  In order to keep their respective governments operating, the nations’ treasuries and central banks are issuing new government bonds on a daily basis.  Thus, there is a constant need for someone to purchase these bonds.  If the market for a particular nation’s bond were to disappear, catastrophe would quickly follow.  Consider what would happen in the U.S. if investors stopped buying the additional $100 billion of new bonds it takes to keep the U.S. government operating each month.

Just imagine what would happen to inflation and the U.S. economy if investors are reluctant to purchase U.S. Treasuries.  You only have to look at the current problems in Europe.  Spanish 10-year bonds issued this past week carried an interest rate in excess of 6% while 10-year U.S. Treasuries were selling around 1.75%.  If the U.S. had to pay interest on our $15.8 trillion debt at a 6% rate, the annual interest cost would be near $1 trillion.  Think that might negatively impact the economy?

The Fed and European Central Bank are largely responsible for the monetary policy of their respective nations.  Interest rates and inflation are critical factors affecting monetary policy and economic results.  Consequently, you can see the vested interest the Federal Reserve and European Central Bank have in making sure there is a steady market for sovereign debt.   As a result, it appears these institutions are willing to give favorable treatment to sovereign debt when measuring bank capital.

I’m not implying there is collusion amongst the bankers.  Contrary to what some people believe, I don’t there is some grand conspiracy.  With a few exceptions, most of the people involved are honest people doing their best in a very difficult economic and political environment.  Central bankers are given tremendous responsibility for a nation’s economic health, yet they are seldom the people making important decisions on taxes, spending and debt, which greatly impact the economy.

My primary purpose in writing this article is sharing information.  I haven’t seen many articles addressing this topic, so I thought it was worth discussing.  Additionally, I think it’s another indication of the long-term problems of deficit spending and huge national debt.   Without realizing it, policy makers can make poor decisions in order to encourage people to buy sovereign debt, because it will be catastrophic if it ever stops.  It’s like a house of cards that’s growing and requires more effort to keep it from collapsing.

Time will tell, but it seems like exempting sovereign debt from bank capital requirements might be one of those decisions.

A New Record

On Wednesday, the United States of America established a new record, although it may not be one we want to boast about.  As of the close of business on Wednesday, the U.S. total debt exceeded $15 trillion.

This bad news gets worse… don’t expect the debt increase to stop or slow down anytime soon.  We’re already two months into the current budget year without an approved budget (that’s a different matter).   However, the 2012 Budget proposals put forth so far expect to add at least another $1 trillion to the debt, which is approximately $3 billion per day.

Interestingly enough, there was very little media coverage regarding this matter.  There was more coverage about Occupy Wall Street, the Supercommittee and the Penn State scandal than our debt breaking the $15 trillion barrier.  After all the acrimony earlier this year about raising the debt ceiling, it might not be considered important news.

Here are a few details about our national debt which might interest you.

  • The U.S. population is approximately 310 million people, which means there is approximately $48,000 of debt for every man, woman and child.
  • The debt is divided into two broad categories; intragovernmental debt and debt held by the public.  The intragovernmental debt is $4.7 trillion and the debt held by the public is $10.3 trillion.
  • The intragovernmental debt is essentially money owed to the Social Security system. When politicians refer to the Social Security Trust Fund, this is what they mean.  Its debt the government owes itself.
  • Even though it may be considered an independent government agency, the U.S. Federal Reserve is now the largest stakeholder of the debt held by the public.  The Fed currently holds $1.665 trillion of U.S. Treasury Securities.
  • China is the second largest holder of debt, with $1.148 trillion.
  • As a result of the Federal Reserve’s quantitative easing, its stake in U.S. debt obligations increased by over $850 billion over the past year.

I may be a bit cynical, but unfortunately I don’t think there is much hope Congress will act to stem the flow of red ink in the near term.  They battled a few months ago and agreed the debt will rise to over $16 trillion by the end of 2012, so I don’t expect much to happen on the political front.  The lack of media coverage is an indication of the lack of interest by Congress in this dubious milestone.

On the bright side, one thing that’s preventing us from being crushed by our own debt is that nearly one-third of the $15 trillion of Treasuries is effectively being held by the federal government (i.e., Social Security and the Federal Reserve).  Thus, our real debt to investors is effectively $10 trillion.  Not a good situation, but better than $15 trillion.

At the same time, it’s not a healthy position for the government to hold so much of its own debt.  Congress may have played fast and loose with the Social Security funds, but the day has arrived when the Social Security payments exceed the taxes collected.  It’s going to put more strain on the budget, and the real cash flow of the federal government, as Social Security starts cashing out its intragovernmental loans.

It’s also not great for the Federal Reserve to continually increase its Treasury holdings.  As I and others have previously written, the Federal Reserve essentially printed money to buy up a huge chunk of government debt issued over the past 12 months.  Quantitative easing may have some economic benefits, but there are tremendous long-term risks from this strategy.

Americans like to break records, and we just broke another one.  Unfortunately, it’s an honor we could have done without.  The real question is what are we going to do to stop the hemorrhaging and get our fiscal house in order?  We just set a new record, and it’s only a matter of months before we break the $16 trillion mark.

More Government Regulators

President Obama has rolled out his proposed 2012 budget earlier this week.  Of course, Congress has yet to pass the 2011 budget, but that is a separate matter.  As expected, there is a tremendous amount of scrutiny regarding this budget.  People are looking for the specifics of how the President and Congress are going to tackle federal spending, the deficit and total debt.

There is one consistent message you can glean from the proposed budget, President Obama wants to increase the number of government regulators, especially for the Departments dealing with money and finances.  The following is a snapshot of the number of the proposed new government hires:

Some of the funding will come from a direct allocation of taxpayer dollars (or additional federal borrowing), and the remaining portion will come from user fees charged by the various agencies.  For instance, the total 2012 cost to implement the financial regulations from the Dodd-Frank Act will be $6.5 billion. Of that amount, $4.8 billion is part of the federal budget’s discretionary spending, and the remaining $1.7 billion will come from user fees assessed to financial institutions.

Bloomberg has estimated that the new $6.5 billion of spending to implement Dodd-Frank is the equivalent of creating a new agency equal in size to the Army Corps of Engineers.  I can’t want to see how many people will need to be added to implement, operate and regulate the provisions of the health care bill.

There is no guarantee that all of these positions will be filled.  The budget has to make it through Congress, which will likely make some alterations, and cuts.  These new positions may serve a valuable purpose, but there is a cost to adding nearly 10,000 new employees to the government payroll.  Congress will have to decide if the cost is worth it.

The President’s 2012 budget shows just how hard it’s going to be to trim federal spending.  Even while talking about deficit reduction and getting government debt under control, the Administration wants to create thousands of new government positions.  They may believe in less government spending, but their budget certainly indicates they believe in more enforcement of government regulations.

Quantitative Easing and Funding the Deficit

The U.S. Federal Reserve (the Fed) decided last week to engage in an additional round of quantitative easing.  Financial industry experts and commentators have dubbed it QE II.  Over the next six months, the Fed will print money to purchase an additional $600 billion of government securities.  The goal is to keep interest rates low and encourage economic growth.

There has been a mixed reaction to QE II. While not offering a personal endorsement, President Obama has been supportive of QE II, but some members of Congress have been vocally critical.  Rep. Mike Pence from Indiana said the Fed was taking an “incalculable risk.”

Criticism has also come from abroad.  Finance ministers from China, France and Germany have expressed their concerns with QE II.  Granted, they are looking out for the financial interests of their respective countries.  As large exporting countries, China and Germany are concerned that increasing the money supply will further devalue the dollar and make U.S. exports more competitive globally.  China has another point of contention.  For years, the U.S. has accused China of keeping the yuan artificially low to make their global exports cheaper.  QE II seems to do the same thing we have criticized China of doing for years.

Beyond the risks of inflation and devaluing the dollar, I believe there is another correlation that needs to be made.  Congress has yet to pass a fiscal 2011 budget, and the government is operating under a continuing resolution, which keeps spending at the same level as fiscal 2010.  Although the final numbers have not yet been calculated, the 2010 budget deficit is approximately $1.4 trillion.  The 2011 budget presented by President Obama projects a $1.3 trillion deficit.

This means that the U.S. government is overspending by approximately $100 billion per month. Coincidentally, the Fed will be purchasing $600 billion of government securities over the next 6 months.

Although I don’t believe these matters are directly related or that there is some great Washington conspiracy, we are in essence self-funding our own deficit spending by printing an additional $600 billion of cash.  The U.S. government and economy may be sufficiently large enough to handle QE II.  However, I believe there is grave danger for any nation that funds its own spending and deficits by printing money, even for a short time.  It’s like lighting the fuse to a box of dynamite.  You can let it burn for a while, but if it burns for too long… be ready for an explosion.

I admit that I am not an economist or as smart as the Fed Board of Governors, but I do believe there are tremendous risks associated with QE II.  The more I analyze QE II, the more I see that Rep. Pence’s calling QE II an “incalculable risk” might be more than a partisan political statement.

The way I see it, the Fed, Congress and President have a short time to deal with the economic and fiscal challenges of this nation.  Quantitative easing may be intended to keep interest rates low and spur economic growth, but printing money – to buy government  debt – to fund deficit spending is a vicious cycle, that can have disastrous effects for the long-term stability of this nation. 

Let’s hope that QE III is the name of a new British cruise ship; not another round of quantitative easing.

Quantitative Easing: Out of Nothing

Quantitative Easing is a monetary policy used by a nation’s central bank to stimulate the economy.  The central bank buys its own government’s bonds on the open market, thereby increasing the money supply. This additional money is supposed to stabilize or lower interest rates, and make it easier to borrow money.

So where does the central bank get the money?  It prints it.

Last week, the U.S. Federal Reserve (the Fed) decided to engage in another round of quantitative easing.  Over the next eight months, the Fed will purchase $600 billion of US government bonds. This will be in addition to the $1.7 trillion of U.S. bonds the Fed purchased between January 2009 and March 2010.  Thus, by the end of June, the Fed will own $2.3 trillion of U.S. debt. The Fed is expected to print up to $900 billion of new money to fund these purchases. 

In a Wall Street Journal article defending the decision, Fed Chairman Ben Bernanke has justified the action as part of normal monetary policy.  He stated that “We see an economy which has a very high level of under utilization of resources and a relatively slow growth rate.”

However, quantitative easing is not without risks.  A spike in inflation is one of the primary concerns.  Printing money creates assets ex nihilo (out of nothing).  Since no additional value is created, pumping more money into the system devalues the existing dollars, which often leads to inflation.  The ability to print money ex nihilo is why the U.S. government will never go bankrupt.  All it needs to do is print more money to cover its debts.  However, this technique usually results in hyperinflation.  History is full of nations that have inflicted financial ruin on themselves by using this type of monetary policy.

Apparently the Fed believes that a lack of liquidity is the cause of anemic economic growth.  I’m not an economist nor as smart as the Chairman, but something doesn’t seem to add up.  We’ve been hearing for months that banks and corporations are currently sitting on approximately $2 trillion of cash. Their reluctance to invest this money is hindering the economic recovery.  If there is already $2 trillion of excess cash, what is the benefit of creating $600 billion of additional liquidity?  Lack of demand and uncertainty of the future seems to be a greater hindrance to economic growth than a lack of money.

The first round of quantitative easing didn’t seem to have much of an effect on the economy. Time will tell if Chairman Bernanke is correct in his assessment of round two.  Hopefully it does as he expects and the economy grows.  More importantly, let’s hope it doesn’t backfire and spark a significant rise of inflation.  If so… we could easily return to the days of stagflation in the late 70’s and early 80’s.

Repeating History: The Predictability of Economic Indicators

Baseball is a sport that relies heavily upon history.  Managers make decisions about pitchers, hitters, runners, etc. based upon historical statistics.  If a certain batter has a lower batting average against a left or right-handed pitcher, the manager may make a pitching change.  The batter may still hit a homerun, but statistically it’s less likely.

Much like baseball, leading economic indicators are based upon the premise that economic history will repeat itself. Leading economic indicators are various statistics or observations that are intended to give an indication of the future direction of the economy.  As written in a previous article, they can be a nationally publicized economic statistic or someone’s instinct of what’s coming next.

Ben Bernanke, the current Federal Reserve Chairman, is considered to be a leading authority of the Great Depression.  He has dedicated a lot of his career studying the causes and remedial measures of the Great Depression.  His intent… to learn from history and avoid making similar mistakes.

The assumption is that economic output will react the same way to similar measures.  As a simple example, raising the discount rate will slow the economy and curtail inflation, and lowering the rate will encourage lending and growth.   The same principle was the basis for passing the $787 billion Stimulus Bill in February 2009.  The premise goes all the way back to President Roosevelt’s plan for ending the Great Depression with the passage of the New Deal.  The ultimate effect of the New Deal and the Stimulus Bill will be debated for years, but the assumption is that if it worked in the past, it will work again.

This theory influences the way economists, investors, politicians and policy-makers approach the economy.  The historical economic results of certain changes in economic indicators form the basis for how they make current decisions.

The difficulty arises when the economy reacts differently.  Economic conditions are as unique and unpredictable as people.  Although statistics may point a certain reaction, the economy doesn’t always function as expected.

Oil prices are a great example of this.  When oil prices spiked in the early 1970’s and 1980’s the economic effects were staggering.  The economy fell into a great recession and inflation took off.  From the beginning of 2007 to the middle of 2008, oil went from $61 per barrel to over $140, a 130% increase.  Although people grumbled and businesses scrambled, the economy didn’t fall into a great recession.  A major recession started in the third quarter of 2008, but it was more a result of imploding real estate and financial markets, than the price of oil.

In this case, history didn’t repeat itself.  Yes… oil prices may have been a contributing factor, but I don’t believe it was the primary cause, like it was in the 70’s and 80’s. 

I’m not suggesting that there is no value to leading economic indicators, but their utility in predicting future economic results is limited.  To the extent you study economic indicators and listen to pundits espouse their opinions of the implications of economic measures, keep this one principle in mind – leading economic indicators assume history will repeat itself, but the economy is like people… it is unpredictable.

Controlling Economic Growth with the Federal Reserve Discount Rate

The Federal Reserve (the Fed) is charged with managing the U.S. money supply and keeping inflation in check.  Increasing the money supply (i.e., printing money) is intended to spur economic growth.  Additional money is supposed to make it less expensive to borrow, thereby encouraging investment and growth. It also devalues the dollar against other currencies, which should increase exports by making American goods less expensive to buy internationally.

The Conference Board includes the Federal Reserve money supply as part of its composite index of leading economic indicators.  Bankers, economists, currency traders and exporters are particularly tuned into the supply of money in the financial system.    

The discount rate is another primary tool the Fed utilizes to achieve its objectives.  The discount rate is the interest rate the Fed charges other banks to borrow from it. 

If banks are in the business of lending money, why are they borrowing from the Fed?  It’s called leverage.  Being able to borrow money from the Fed allows banks to leverage their deposits and loans.  Banks only keep a fraction of the money deposited to them on hand.  The rest is loaned out.  However, if you want your money, they have to be able to pay you when you to withdraw it.  The ability to borrow from the Fed allows banks the ability to keep fewer reserves and lend more money. Consequently, the discount rate affects the interest rate banks charge you to borrow money.

In general, the Fed increases the discount rate when the economy is doing well.  Raising the interest rate slows growth, which is intended to keep inflation in check.  Furthermore, in good economic times, people don’t need as much of an incentive to take risks or borrow money and are willing to pay a higher interest rate to access capital.  Conversely, in recessionary times, the Fed will reduce the discount rate to lower lending rates and spur economic growth. 

If you study the history of the Fed discount rate, you’ll see increases during periods of economic prosperity and rate cuts during recessions.  The size and timing of the rate cuts or increases are indications of the economic conditions. 

This is evidenced in the Fed discount rate over the past two years. The Fed dropped the rate seven times in 2008, reducing the rate by 0.75% three times.  The rate was 0.5% at the end of 2008, and hasn’t been that low in over 30 years.  This is an indication of the severity of the current recession, as if you needed another sign.

The Fed raised the rate 0.25% in February 2010, on signs the economy was strengthening.  However, the Fed has indicated that it doesn’t expect any rate increases for an extended period of time.  With rumblings that the recovery is slowing, the Fed may be pushed to lower the rate once again, but it doesn’t have much further it can go.

You don’t have to wear yourself out trying to understand monetary policy, money supply and inflation factors.  If you want to get a quick synopsis of the Fed’s current view on the economy, just watch their action on the discount rate.  No change means you can expect things to stay the same for a while.  A reduction is a sign of trouble, and an increase is an indication that things are getting better.

With the Fed saying that they expect to hold the discount rate static for an extended period of time, you can expect the economy to continue to slog along.  It may not be great, but hopefully it doesn’t get worse.

Leading Economic Indicators: Anticipating the Rollercoaster Economy

I like rollercoasters.  There is something almost sadistic in enjoying the feeling of being hurled up, down, left and right at breakneck speeds.  Twists and barrel rolls only add to the excitement.  There is always great anticipation when you hear the clacking of the chain underneath the car as you ascend to the highest point of the coaster and prepare to make that first downward plunge.  Unless you close your eyes, you can see what’s coming next for the rest of the ride. 

Life, businesses and the overall economy are much like a rollercoaster, only much less predictable.  Leading Economic Indicators are statistics that are intended to provide insight of what’s coming next in an unpredictable economy.    

Leading Economic Indicators work on the general assumption of a cyclical economy (i.e., the economy cycles between growth and recession).  The presumption is that bad economic times will eventually become good times, and good times will ultimately turn into a recession.  Imagine a wave-graph.  Leading economic indicators identify when things are going to get better and when it’s about to get worse.  Unfortunately, the economy doesn’t operate in the smooth pattern of a wave graph.

For many, the major U.S. stock markets are a leading economic indicator.  The DJIA and NASDAQ will start to decline before a recession begins, and they will start to increase before economic recovery solidifies.  This reflects the current economic conditions.  The stock markets have rebounded tremendously since the lows of early 2009, but overall economic conditions are still rather perilous.

Aside from the Conference Board’s official composite of leading economic indicators, people have others that are much less precise.  Billionaire William Buffet says the most important indication of overall economic conditions is rail car loadings.  At one time, former Federal Reserve Chairman Alan Greenspan, watched the sale of men’s underwear.  Check out this Time article for 10 rather unusual, and somewhat humorous measures. 

You may read the Conference Board report, study the Bureau of Labor Statistics’ releases or measure blackouts of NFL games to gauge the strength and direction of the economy. Understanding economic indicators is one thing, but determining future economic activity is another.  Businesses and economic activity is determined by people, and let’s be honest, we’re unpredictable.

As exciting as rollercoasters are, life is much more thrilling because it’s completely unpredictable.  Keep your eyes open and hold on for the ride.

The Economy Built on Confidence

You may have heard the term consumer confidence bantered around by economists and journalists.  The consumer confidence index is an attempt to determine the opinion of the public at-large regarding the economy.  It’s supposed to be an indicator of spending and savings habits.  In a consumer-driven economy, consumer spending has a tremendous impact on the overall state of the economy.

Confidence has a much larger impact on the US economy than the number of new cars, flat-screen televisions and iPhones that will be purchased.   To a certain extent, the entire economy is built upon confidence.

It starts with confidence in the US government, or at least in the money they print.  If you read my prior article on the Value of Money – Part III, you’ll recall that US currency is fiat money.  Since value is not determined by gold or any other asset, its value is solely derived from the full faith and credit of the US government.  Consequently, the confidence that people and investors have in the US government affects the value of the dollar. Should people lose confidence in the US government, the value of the US dollar will drop.  Considering the size of the current foreign trade deficit, it would instantly result in higher prices of things like oil and gasoline.  It would also raise the cost of borrowing, further exacerbating the current annual budget deficit and total debt obligation.

Confidence also plays a huge role in the banking and financial sector.  How would you react if you seriously questioned the long-term viability of the bank that holds all of your money?  You may be a loyal customer, but no one would be surprised if you transferred your funds to another institution.  Even if all of your money was FDIC insured, would you want to take the risk that some of it could be unavailable while the regulators sort through the mess?

The entire financial system was facing a crisis of confidence in September 2008.  Lehman Brothers declared bankruptcy on September 15, 2008; on the next day, the Federal Reserve Bank put up $85 billion to save AIG from a similar fate; and the Reserve Primary Fund money market broke the buck later in the day.  These historic events happening in a matter of days caused many people to speculate that it was the beginning of another Great Depression. The lack of confidence in the financial market was causing paralysis.  Everyone wanted their money to be safe but didn’t know where to put it, for fear that any institution could be the next to fail.

To instill confidence back into the markets, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke rolled out the Troubled Asset Relief Program (TARP) on September 19, 2008.  We can debate the merits of TARP, but at the time, it did appear to bring enough confidence back into the markets to stave off a complete meltdown.

A lack of confidence can also wreak havoc on a company.  General Motors and Chrysler are two good examples.  As they were teetering on the brink of bankruptcy, potential buyers questioned the survival of the automakers and were very reluctant to buy their vehicles.  People were concerned about the companies’ ability to honor their warranties and the future availability of repair parts.   Once again the US government intervened in an unprecedented manner and guaranteed the warranties of all new cars being purchased.  The government guarantee provided consumers with the confidence they needed to make the purchase.  Again, we can debate the propriety of this move, but would you want to buy a product from a company you didn’t think would exist in a few months or years?

Confidence has become the underpinning of the entire economy.  Confidence determines the value of your money.  It determines the security of your savings and provides you with the ability to save, spend and transact business with others.  It also can determine the success or failure of the company you own or work for.  

Now you can understand why the President, government officials and business leaders do their best to instill a sense of confidence in the economy.  It’s more than politics and positive thinking.  Once you witness the downward spiral that a lack of confidence brings, you get a better appreciation why consumer and economic confidence, whether real or perceived, is necessary.

Like trust, confidence is hard to gain and easy to lose.  In an economy built on confidence, maintaining a sense of confidence becomes the most significant economic indicator of success or failure.

Lending Lesson Not Yet Learned

On June 14, 2010, the Wall Street Journal printed an op-ed piece about the politicizing of the Federal Reserve System, which has functioned for 97 years with minimal political meddling.  There are provisions in both the House and Senate Financial Services Reform bills which have the potential to introduce a lot of politics into the U.S. monetary policy.

One thing mentioned in the article is the creation of a high-ranking position at each of the 12 regional federal banks.  This Presidential appointment would be responsible to “ensure equal employment opportunity and the racial, ethnic and gender diversity” and “increase the participation of minority-owned and women-owned businesses in the programs and contracts.”  Seems rather benign until you consider the backdrop of the mortgage meltdown over the past couple of years.

One of the factors that contributed to the present financial crisis and economic recession was issuing home mortgages to people who had a dubious ability to repay.  The Federal government’s goal for more than 20 years of increasing home ownership resulted in a gradual change of lending standards (e.g., subprime loans, 100% financing and option ARM’s). 

Twenty years ago virtually every banker would have considered it insane to lend on any of these terms, yet they did.  Why? Because they were able to off-load these loans to Fannie Mae, Freddie Mac and other investors.  The government was willing to back the loans because it furthered their goal of increased home ownership.

Like a pendulum, the lending standards over the past two years have swung dramatically in the other direction.  Clients who purchased or refinanced their home have experienced difficulty getting approved, even though they had a securities portfolio multiples times the value of the loan they were seeking.  In less than 12 months lenders went from giving loans to people who couldn’t repay to virtually refusing loans to those who don’t need to borrow.

A loan is different from a gift… the money is supposed to be repaid.   If you have ever lent money to someone, even $5, you know the greatest risk is that you won’t get repaid. Common sense would dictate that a borrower’s ability to repay is the most important criteria when making a loan. 

In Martin Luther King Jr.’s famous I Have a Dream speech, he said he dreamed that “my four little children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character.” I’m sure that banking practices were not on his mind the day he delivered his speech, but the principle applies. No one should be denied a loan based upon their race or gender, but you also should not get a loan, or preferential terms because of it either. The concern with these political appointees is that they will exert pressure on the banks to lend based upon gender or race, rather than strictly on the merits of the loan. 

There are many lessons to be learned from the financial crisis of 2008.  One of those lessons is to deny loans to people who can’t reasonably repay, even if it’s for a good cause.  Politicians should not pressure banks to lend to people who can’t repay.  If they do, it’s a lending lesson they have not yet learned.