Obama's Influence on Bank Lending Is in Doubt

Dec. 15, 2009 — -- President Obama urged bankers Monday to do more in "every responsible way" to increase lending to consumers and small businesses.

But how much pressure is Obama actually exerting on banks, and what effect will it have?

Experts who spoke to ABCNews.com on the issue were skeptical, leaning on the side of not much.

The country's major banks have already repaid or are on track to repay billions in bailout funds from the government's Troubled Asset Relief Program -- a move that will free them from government compensation restrictions. But economists say that Obama and elected officials still, theoretically, have tremendous influence over the banks because of the banking reform efforts sweeping the nation's capitol.

"Fundamentally, they're in the midst of rewriting banking regulations that are going to affect how these guys operate for the next two decades or more," said Harvard economics professor and former Federal Reserve economist Kenneth Rogoff. "Certainly the president has a lot of sway over them."

Obama, he said, "has to say he's mad, because if he's not mad, he doesn't have any emotions. … But exactly what he's prepared to do is much less clear."

And harnessing his influence to promote specific goals will be difficult, Rogoff said.

"It's not clear how easily [Obama] can laser in mortgage foreclosures or increase lending to small business," he said.

Part of the problem, economists say, is that the administration and government regulators have been sending banks mixed messages.

The Federal Reserve and the FDIC, for instance, are worried about banks' capital positions and how strong their balance sheets are, said Vincent Reinhart, a former director of the Federal Reserve Board's Division of Monetary Affairs and a resident scholar at the conservative American Enterprise Institute. Emphasizing the health of a balance sheet during tough economic times can discourage more lending, he said.

"Making more loans right away at a time when the economy is weak isn't the formula for strengthening your balance sheet," Reinhart said.

"There's just an internal inconsistency in expecting banks to take on risk and also expect them to rebuild their capital," he said.