Jawboning the Bankers

When presidents want to persuade an opponent they often resort to verbal intimidation or “jawboning.” President Obama recently jawboned American bankers hoping they would start lending money to small and medium-sized businesses. He may slay his own political reputation if they comply.

A jawbone is an ancient weapon. You may recall that Samson wielded a jawbone of an ass to slay Philistines committed to his destruction. When tensions were flaring between the United States of America and France during the early presidency of John Adams, Adams’ party, the Federalists, reportedly raised a July 4 toast to the second president saying, “John Adams: May he, like Samson, slay thousands of Frenchmen with the jawbone of a Jefferson.” Jefferson was Adams’ vice president, was viewed as a French sympathizer, and was the leader of the political party in opposition to Adams. In the 20th century, John Kennedy jawboned the steel industry into lowering prices in the 1960s, and his successor, Lyndon Johnson, is known as the greatest of all presidential jawboners.

With this rich history of jawboning behind him, President Obama went after the “fat cat” bankers last week in a variety of media appearances. Despite the Federal Reserve pumping hundreds of billions of dollars into the financial system over the past several months, banks are not lending and making it difficult for smaller businesses to obtain credit.

There are sound reasons for bank inaction, including a lack of quality loan applications, fear of additional mortgage failures and the need to cover losses, and the ability to earn risk-free interest on excess reserves and government bonds. Obama may want to consider jawboning his Federal Reserve chairman, Ben Bernanke, into ending the practice of paying interest on excess bank reserves implemented during his presidency. Without access to this easy money, banks may be willing to make more loans to replace the lost income.

What if banks feared Obama like the Philistines feared Samson and immediately started to loan again? Due to our fractional reserve banking system, we could experience a nasty bout of inflation if the Federal Reserve failed to act fast enough to yank money from the system. In other words, more business loans could turn into an exponential increase in the money supply, which in turn could produce excessive inflation.

In direct response to President Obama’s jawboning, Bank of America made a verbal commitment to increase business loans by $5 billion. If other banks follow suit, the American economy may face another challenge and President Obama, like past presidents, may bear the brunt of the blame. He may need a jawbone to fight his way out of that debacle.