Thomas Friedman can be a shallow thinker, but I've rarely seen him write anything as straight-up wrongheaded as this. His argument is that the government's injection of equity into the banks is probably necessary, but it's also dangerous, because ... well, here's why it's dangerous:
Let’s imagine this scene: You are the president of one of these banks in which the government has taken a position. One day two young Stanford grads walk in your door. One is named Larry, and the other is named Sergey. They each are wearing jeans and a T-shirt. They tell you that they have this thing called a “search engine,” and they are naming it — get this — “Google.” They tell you to type in any word in this box on a computer screen and — get this — hit a button labeled “I’m Feeling Lucky.” Up comes a bunch of Web sites related to that word. Their start-up, which they are operating out of their dorm room, has exhausted its venture capital. They need a loan.(Is there anything more perfectly Friedmanesque than the way he (a) works in a reference to the "I'm Feeling Lucky" button, and (b) misstates what it does?)
What are you going to say to Larry and Sergey as the president of the bank? “Boys, this is very interesting. But I have the U.S. Treasury as my biggest shareholder today, and if you think I’m going to put money into something called ‘Google,’ with a key called ‘I’m Feeling Lucky,’ you’re fresh outta luck. Can you imagine me explaining that to a Congressional committee if you guys go bust?”
This story and the threat it raises -- future Googles stifled in their cribs by risk-averse government bureaucrats -- has no connection to reality. When Larry and Sergey wanted money to start Google they didn't go to a bank and take out a loan. First they found an angel investor named Andy Bechtolsheim, who'd made his money as a cofounder of Sun Microsystems. Then they went to John Doerr of Kleiner Perkins and Mike Moritz of Sequoia Capital, the two most famous venture investors in Silicn Valley.
In other words, they raised money by selling equity rather than by borrowing. This is how startup financing works, for obvious reasons: Almost all startups fail. So a bank that lent money to guys like Larry and Sergey would see default rates that would make subprime mortgages look blue-chip. A venture investor, on the other hand, gets a share of the upside; he's happy to watch nine startups fail as long as the tenth is Google.
(Venture firms are currently reducing their investments in response to the bleak economic picture, and that might slow the parade of new Googles, but it has nothing to do with government ownership of the banks.)
OK, ignore the Larry-and-Sergey story. Does Friedman have a deeper argument? I guess it's that banks with public equity will be more risk-averse in lending, because ... well, he doesn't really say why. Oh, OK, he says they'll have to justify each failed loan to "a Congressional committee," which given the number of loans involved is absurd on its face. Is that just a cutesy way of saying that they'll have to justify their balance sheets as a whole? If so, what makes Friedman think a Congressional committee would be more risk-averse than private shareholders?
The problem in the economy is that, right now, private lenders are maximally risk-averse: until last week they weren't lending at all. The government took positions in banks precisely to encourage them to make riskier loans than they were making under private ownership. It doesn't seem to be working, but (pace Friedman) that's not because those bold risk-taking bankers are being stymied by government bean-counters. It's because the banks don't want to make any loans at all, and (so far) the government isn't forcing them to.
