Give Me a Little Credit, OK?

Writing for the December 31 New York Times, Eric Dash and Vikas Bajaj suggested that the key to hitting bottom and beginning the slow road to recovery was unlocking the credit markets. Banks are wary of other banks, making the routine packaging of larger credit lines – a lifeline to corporate America – into “bank syndications” where a number of banks participate as a group in these larger loans, nearly impossible.

The Times: “A big worry is the future of securitization, a key mechanism of modern banking that enables banks to bundle loans and bonds into securities for sale to investors. This crucial market is moribund now that many of its creations have plunged in value. Some question when, or if, certain areas of securitization will revive.”

Hoarding by banks has reached unprecedented highs – there’s lots of money, just a complete lack of confidence in making the loan: “For now, many banks are hoarding money rather than lending it. Their holdings of cash have nearly tripled to just over $1 trillion in the last three months, according to Federal Reserve data.” The same credit rating agencies that brought you high credit ratings on packages of subprime loans are still operating under the same old rules. The result is that people are skeptical of their debt ratings. The SEC better move fast to create and enforce a regulatory schema on these agencies or their opinions will have little value.

And corporate debt placement (e.g. bonds and commercial paper) is languishing as all but the most clearly creditworthy companies can access this traditional debt market. Instead, investors are willing to take zero or negative interest rates in U.S. Treasuries today. Home loans are more accessible thanks to new policies and Fannie Mae and Freddie Mac, with 30 year fixed rate loans hovering around 5%. But for many homeowners, considerably underwater, the temptation to “walk away” keeps growing, particularly as the job picture continues to darken.

To me, the freeze in the credit markets is not a cause but a symptom of a litany of other problems, virtually all of which can be traced to government decisions, from lowering taxes and then borrowing heavily to fight two wars, from policies that let major derivatives, private equity and hedge funds float with little or no federal regulation (See my Tipping Points Revisited blog earlier), abandoning federal support for education just when the country needed to increase productivity, etc. It’s a long list, and consumers and companies joined the government in an over-borrowing frenzy.

Even forgetting about the past, what bank is going to lend based on a credit rating it does not trust, against assets likely to decline, into a marketplace where buyers are drying up and to people who are likely to see their jobs vaporize or, if they are still able to work, their wages erode? As I have said before, this is not an easy fix. You can’t tell banks they have to lend even if you gave them cheap money as the Federal Reserve provided cheap money. You have to repair the regulatory structure that governs American financial transactions from the ground up, stop the fall of housing prices, save old jobs and create new ones (and new industries) and raise the level and productivity value of our educational system at every level. In short, you have to rebuild fundamentals to restore trust and confidence in the country and in the markets.

I’m Peter Dekom, and I am really hoping we hit bottom soon. Happy New Year.