You Can Lead a Bank to Water, But You Can’t Make it Lend!

At the end of 2007, when this “recession” (I called a managed depression) began, banks had cash reserves that were… er… approximately zero, but they were lending like the banditos they truly are. Today, estimates place these bank cash reserves at about $2.2 trillion, enough to ignite the economy and stem the tide of growing unemployment. The whole TARP structure was designed to shore up balance sheets to unfreeze the credit markets, but except for specific lower-end housing and car loans provided by the automakers, credit is scarce, and where it does exist, loan rates of 8%-12% are commonplace (remember, the banks can access Federal Reserve money virtually for no cost!).

We’re watching profoundly low or no yield short-term Treasury bonds still getting sold into the market. Why? Why not lend money at higher rates and make a profit? The President is telling the American people that there is light at the end of a very dark tunnel, because the stock market had a good run. But the message we are getting from the financial markets is “extreme caution.” Unemployment numbers (a trailing economic indicator) are horrible and getting worse, particularly in parts of the rust belt and the “sand” states. Housing is still sliding in most markets, but some areas are indeed bottoming out. And no one really believes that the stock market has permanently turned-around.

So there is lots of available money to be loaned by bankers that the nation has repeatedly labeled as “irresponsible,” “reckless,” and “without accountability” based on mendacious loan applications and unjustified credit ratings. The Feds, particularly the Office of the Comptroller of the Currency (Dept. of Treasury), have made it clear that reckless credit practices will no longer be tolerated. Congress and the President speak of a new level of strict regulatory compliance – a ground-up new regulatory schema, in fact – and the G-20 leaders have screamed in unison: “Never again!”

And yet, the federal policies are totally directed at shoring up balance sheets of these banks, making sure that they can withstand the “stress test,” and encouraging them to lend wherever possible. Notice the complete contradiction in policy positions? Lend more, but don’t take risks in a market where everyone’s income is suspect, assets/houses are falling in value and retail sales are flopping downward. So what do banks with money do? Charge higher rates to cover losses when they do lend (rarely), just in case. Don’t lend much at all, just in case. And wait until the economy is so clearly stabilized that the lending risks are gone.

Catch 22. Without unfrozen credit markets, the economy just doesn’t stabilize (unemployment keeps rising because businesses cannot operate), so the circle spins viciously around. The bankers just want their fat paychecks and perks, but they don’t want to get nailed by the regulators by making suspect loans. Where the government guarantees the loan, like with Mr. Geithner’s toxic asset purchase loans, the banks will go there, but for most small and medium businesses, and even more than a few giants, the credit markets look like Antarctica . Without direct federal mandates or direct guarantees, these bankers are content to sit on their $2.2 trillion in cash reserves and wait, and wait, and wait.

I’m Peter Dekom, and please, someone, make the bad man stop!