BUT IF YOU’RE LOOKING FOR POINTLESS AND EXPENSIVE POLICY PRESCRIPTIONS, YOU’VE COME TO THE RIGHT PLACE

Megan McArdle points out (rightly!) that regardless of the topic, policy kibitzers tend to not know what in blazes they’re talking about. I wonder if she was thinking about this guy:

[I]nvestors are still fleeing the bank stocks on fears that the banks’ mortgage problems and exposure to European debt problems are much larger than they appear. And that makes bank executives even less willing to make new loans. And so the banks are stuck, and with them so is the economy and the rest of us.

There are a number of things that could be done. The easiest perhaps would be to have another round of stress tests. That would give investors more faith in the truly healthy banks. Second, the government needs to push forward a plan to deal with all the foreclosures. Uncertainty over what will be done with underwater homeowners is hurting the banks, more than the real losses they should be taking on the actual loans. No one wants to accept their mistakes. But the government needs to force the banks to do it, so we all can move on.

Another option would be to create a program where the government offer insurance to banks that make loans to companies that plan to use that money to create new jobs. This would be a win for both the job market and the banks, which get the interest income and assurances for investors that they are somewhat protected from losses on new loans. Yes, there might be some Solyndra-type failures. But if you make these government guarantees and not an actual lending program, then you keep the loan making decisions with the banks and not the government.

I’ll take the bolded items above one at a time. First, more stress tests? We’ve already had stress tests. Since then, the banking industry has been solidly profitable and the credit quality of their loan books has improved. Bank capital has risen and loss reserves have come down. If that first round of stress tests, combined with banks’ subsequent financial results, haven’t convinced bank investors of the blindingly obvious fact of banks’ financial strength, I don’t see why a second round of tests would do any better.

Second, what sort of “plan to deal with all the foreclosures” does he have in mind? Loan modifications? Principal reductions? If those were carried out on a scale that would provide meaningful mortgage debt relief nationally, the losses to the financial industry would be crippling. Why would that be good? I thought the point was to get the banks to lend more, not render them insolvent.

Finally, guarantees. How soon we forget. Government loan guarantees, most notably in residential mortgages, is one of the reasons we got into the whole mess to begin with. Now we there should be more? Besides, the government already guarantees certain loans to small business, in precisely the way he recommends, via the Small Business Administration. It’s hard to imagine a expansion of the SBA, on any scale, that would ignite a large-scale economic revival. Loan losses to the government, yes, revival, no.

So what’s to be done? Well, for starters, President Obama could do worse than having Tim Geithner have a little chat with the regulators. That’s not even expensive. . . .

Note: Brain cramp related to McArdle’s first name fixed, above. Thanks to the Broaday fans who pointed it out. . .