Banks fool governments yet again.

According to the Wall Street Journal, banks have persuaded governments to water down restrictions on bank activities (big surprise). Governments have been persuaded that “tougher requirements would diminish the credit needed to revive a sluggish global economy”.

The flaw in the latter argument is that there is no limit to the stimulus that a government can give its economy for a given set of bank regulations. Stimulus CAN come from more commercial bank lending, but equally, it can come from government spending more (and/or cutting taxes).

So what is the optimum combination of the two variables, first, bank lending and second government spending and/or tax cuts? A precise answer is difficult, but for a statement of the obvious, commercial bank lending does not want to be on a scale that means that at the margin loans are irresponsible. Unfortunately the latter seems to be exactly what is happening. That is irresponsible lending is rearing its ugly head even though the economy is still a hundred miles from getting back to pre-crunch levels.

But banks don’t give a hoot. Ninja mortgages, mortgage fraud etc with banks taking their cut at every turn and leading to another trillion dollar taxpayer funded bank bailout is how banks make their money nowadays.