Banks trying to recoup from bad loans and inadequate reserves urged to lend

There’s a juxtaposition in a Washington Post article today that deserves a “Wha?” The article focuses on the huge drop in bank lending in 2009 – 7.5 percent or $587 billion – a plunge that hasn’t been seen in more than a half century.  Sheila Bair, chairman of the Federal Deposit Insurance Corporation, is quoted:

“But Bair said that the vast majority of the lending decline was the result of cutbacks by the nation’s largest banks, which have tightened qualification standards for borrowers and increased the proportion of money that they hold in reserve against unexpected losses.

‘Large banks do need to do a better job of stepping up to the plate here,’ Bair said.”

Didn’t indiscriminate lending and inadequate provision for loan losses contribute to the financial meltdown?  In this uncertain climate, isn’t it a good idea for banks to tighten their lending standards and increase their reserves? But, no, stimulating the economy is the game du jour.