The chairman of the Federal Deposit Insurance Corporation, Sheila Bair, spoke in New York today and offered the following: "To repeat: large banks today need more capital, not less." This is a puzzling thing to say for a whole variety of reasons. First, it undermines public confidence in the banking system. We'd been told that after the stress tests and the capital-raising that followed, the banks were adequately capitalized. Now Ms. Bair tells us they need more capital? When is it going to end? And why should anyone put more capital into a bank now when at any moment some government regulator may come along and order the bank to raise more capital, and thereby dilute the existing shareholders? By not saying which large banks she is talking about, she effectively casts doubt on all of them. Second, she's undercutting the White House message to the banks, which is that they should lend more. A top Obama aide, David Axelrod, said recently on ABC's "This Week, "The most offensive thing is, we haven't seen the kind of increase in lending that we should...They ought to meet those responsibilities, and they ought to express them by increasing lending, which is what we need right now." If the banks follow Mr. Axelrod's advice and lend out their money, that means the money won't be around when Ms. Bair comes around to check how well-capitalized the banks are. The banks are damned if they do and damned if they don't. Not that we have a lot of sympathy for bankers around here -- they are going to be paying out plenty of bonuses and are even showing some profits, which suggests that Ms. Bair's concerns about capital may be overwrought. All along, a lot of these banks didn't have capital problems, they had liquidity problems, which are different.
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