Some also believe that the government may use the capital to entice strong banks to take over weaker institutions, perhaps by allowing an acquirer to use government capital to finance the transaction.
"I think you'll see a very active process, including shotgun marriages," Mix said.
Even if they obtain understandings about how the money is to be used, regulators would be wise to avoid being very specific about the kind of lending they expect, experts say. For one thing, the recessionary economic climate may limit the supply of suitable borrowers.
"The problem with politicians mandating lending is that they do it irrespective of the creditworthiness of borrowers," said Robert R. Bliss, a former economist at the Chicago and Atlanta Federal Reserve banks and now a business professor at Wake Forest University.
There is also the strong chance that government coercion won't be necessary. Banks make money by making loans, but in recent months the commercial lending process has been disrupted by a hard freeze in interbank lending.
Interbank loans, which are generally provided for periods as short as overnight, is the essential lubricant in the overall lending market. It allows banks to make longer-term mortgage, business and personal loans without worrying that doing so will leave them unable to cover their daily cash needs.
The credit crisis originated in part because banks lost confidence that their lending partners were healthy enough to pay them back. The interbank market began to seize up, and consequently banks became reluctant to make long-term consumer and business loans.
"Banks have been afraid to lend to each other because they don't know who's going to be around," said former New York State Banking Commissioner Muriel Siebert, the head of a Wall Street brokerage firm.
The government's program, which includes guarantees for almost all bank deposits while cushioning banks against loan losses by injecting new capital into them, is designed to restore this damaged confidence.
With the interbank market showing signs of recovery, banks will no longer have an incentive to hoard the government's cash.
"Banks need to earn revenue," observed Jerry Marlatt, a corporate finance expert at the Clifford Chance law firm in New York. "The only place that revenue comes from is making loans."
Banks could park the government's capital in ultrasafe Treasury securities "for a couple of months," he said, but those securities earn minimal interest.
"In the long run, it would generate enormous losses if it's just sitting there. It's just not in the banks' interest not to put their money out into the community."
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michael.hiltzik@latimes.com
