TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

The Economist describes China’s financial system:

Big credit decisions in China are not advanced by any one bank, nor any one banker. Credit is infused and withdrawn by central diktat. That process has extraordinary appeal to state planners but is horribly inefficient for individual institutions. In recent weeks, for example, as the screws on lending have tightened, favoured industrial companies have been getting urgent calls from their bankers demanding that they immediately scoop up their credit needs for months to come, or be subject to a freeze of uncertain duration. Firms that manage to load up on credit still suffer because they bear interest costs long before the money is actually needed.

“The Chinese banks are pure utilities,” says one banker. “The State Council [the government’s chief administrative arm] tells them to lend, and they lend.” Overt controls increase in line with the amount of credit. Loans above $500m are said to be directly vetted by the State Council.

China’s economy is by no means a free market. While individual firms are allowed some semblance of freedom, the government manipulates the economy towards its ends. Economic success is had through the government, not through the market.

The U.S. economy is stepping in this direction. Fannie Mae and Freddie Mac are perfect examples of this model: their primary intent is not to make a profit, but to expand credit in the housing market to fulfill the government’s policy goal of increased homeownership. They are given special privileges to do so, and they played a large role in inflating the housing bubble by allowing too much liquidity in the market. Government distortion of the market has consequences.

Rather than recognize this, however, the Obama administration has tried to adopt its own version of China’s government-dictated banking sector:

President Barack Obama challenged top bankers Monday to explore “every responsible way” to increase lending, saying they were obliged to help after being rescued by taxpayers. He asked them to “take a third and fourth look” at their small-business lending.
…
Obama, in a statement after more than an hourlong meeting with the executives, said he reminded them that much of the financial crisis that took the U.S. banking system to the brink of collapse had been “of their own making.” He also exhorted the executives — both in private and in public — to drop their opposition to an overhaul of the nation’s financial industry.

Besides being completely un-presidential — attempting to shame private businesses in to supporting government policy — it is wholly antithetical to a free market, and exactly what led to the financial crisis: government policy encouraging dumb loans and investments. Yet here we are, and the administration is now pressuring banks to do precisely that. When they say lend, they lend. Or at least that’s what the administration is seeking.