Catch-22: Why Banks Can't Lend

We've heard a lot lately about how if the banks were lending more, the recession might not be as bad. Not so fast, I say. Indiscriminate lending caused this recession, via the busted housing bubble. And most of the banks aren't in a position to help us lend ourselves out of this mess.

Once bitten, twice shy
To unfreeze credit markets, the banks have to lend more to consumers that have no money to spend at present -- the same consumers that got them in trouble! They're unlikely to do so voluntarily. Unless, of course, the government nationalizes many big banks -- a possibility mentioned in several news reports -- but even then, lending is unlikely to happen using the same reckless lending standards that were used just a couple of years ago.

Business lending is falling, too
Every quarter, the Federal Reserve issues the Senior Loan Officer Opinion Survey on Bank Lending Practices. (You can see the whole survey here or just peruse the charts here.) It is clear that more lenders are tightening their standards than during the last recession in 2000-2001. They certainly had sharply tightened since the last survey. About 85% of banks -- up from 60% in the previous survey -- reported having tightened lending standards on commercial and industrial loans to large businesses.

Beneficiaries of the lending campaign?
If a bank were lending irresponsibly, it suffered huge losses that depleted its capital. Hence, the bank cannot ramp up lending even with TARP money pouring in. Generally, TARP infusions have been less than total capital losses. Some imprudent banks like Wachovia and Washington Mutual were acquired for pennies on the dollar by banks with tighter lending standards -- Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) , respectively. Is it likely that prudent banks that have survived the current carnage will relax their lending standards now? I didn't think so.

US Bancorp (NYSE: USB  ) and Goldman Sachs (NYSE: GS  ) , which now is a bank holding company, are two of the other banks that are in better shape and might be able to ramp up lending. Goldman, in particular, remains (by far) in better shape than anyone else on Wall Street.

The key takeaway from all this? When it comes to banking on a lending comeback, stick with the ones that sat out the party the last time we had a lending boom.

For more on banks that know how to lend:

Fool contributor Ivan Martchev does not own shares in any of the companies in this story. US Bancorp and JPMorgan Chase are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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  • Report this Comment On January 27, 2009, at 6:35 PM, mlaursen wrote:

    And if they do lend to people who are high risks, and lose money, they'll be accused of predatory lending.

  • Report this Comment On January 27, 2009, at 10:56 PM, denniswolz wrote:

    What is actually going on in the world?

    There is an Over Supply of Everything

    There is an over supply of everything at a cost that the wage earner (95 % of the population) cannot afford.

    Too many houses at prices only the upper class can afford.

    Too many cars at prices only the upper class can afford

    Too many condos.

    Too many strip malls.

    Too many people without jobs.

    All of this excess worked as long as the person borrowing the money didn’t have to prove they could pay it back. Didn’t have to find a buyer for the product being created. Now that the rules are being applied no one is his right mind will loan money or borrow money. With this excess in the system and no one willing to reduce the price all traffic stops.

    Productivity doubled in the past ten years and the consumer base only went up by about 10 percent.

    Everybody had to build their houses or condos or cars or strip malls (with borrowed money) knowing full well that everybody else was building too many also. All you had to do 2 years ago was look around and you could see the explosion of housing, condos, cars, strip malls, etc. Everyone had to get their share of a pie that wasn’t growing. In fact, it was shrinking because those producing the product were much more efficient at production. It now takes one farmer to do what 1000 did 20 years ago. It takes 11 man hours to build a car that used to take 100 hours. It takes one warehouseman to do what 20 did 10 years ago. It takes one office worker to do what 10 did just 10 years ago with the exception of the government workers where it takes two to do the same as one.

    Even though productivity went up prices for the product went up instead of down like it should have. Management took the increased net profits per unit that the additional productivity gave them and built new plants or paid themselves exorbitant amounts of money knowing full well that the glut would eventually destroy the golden goose. What they should have been doing is reducing the selling price of the product and making them affordable to the 95% that spend their money. Given the gains in productivity prices should be less than they were ten years ago. The only place you will find this to be the case is at Wall mart.

    Wall mart is the only business that sources their product and marks it up based on a reasonable return. Most companies have adopted the what is the other guy charging or worse yet collusion pricing (get rich now at someone else expense)

    Even though Wall mart is the savior of the little people (95 % of the population) it is also the devil in the economy. One of their stores is replacing at least 100 maw and paw stores of 10 years ago. Strip malls are empty because an owner operator cannot compete with the giant down the street.

    The Governments role in the collapse of the economy

    The government allowed excess by using tif’s and multiple other tax advantages so that their community or their state could get future tax revenues. They fought over who would get the next mega mall or mega plant or mega housing development build in their tax base. Most of this development was done with borrowed money with little if any rationalizations as to whom or what will pay the money back. Again, the people at the top were being paid outrageous amounts while the developments were being built with no downside risk since they were not the ones that were going to be around a year or two after the developments finished.

    How many times do you see a policeman or a fireman driving a car or truck that is over a couple of years old. How many times do you go to a courthouse and see the judge or anyone sitting on a torn chair or anything that looks used at all. The government of the people became the government of the greedy. Our government has to have the best of everything while the citizens do without. When has a government returned money to its citizens because they took in more than they could spend?

    The beauracrats allow big companies to stifle any new startups by using excessive regulations to keep anyone trying to sell a widget at a fair value out. By the time you realize you have to comply with city, county, state and federal paperwork plus the IRS you give up and go on the welfare. I have seen numerous businesses that have failed to open due to the heavy hand of our own government. This is criminal and I would be glad to go after the government criminals.

    The solution

    There is no quick solution. There are a lot of things we can do to make things less miserable for the populace.

    The reason there is no solution is that there are too many people versus the work available that would produce an income that could pay for anything more than existence.

    When milk, bread and eggs plus rent and utilities take up more than a person makes, if they can find a job, the results are worse than bad for the economy.

    Commodities prices have to come back to ten year levels since wages haven’t risen. Oil has to stay at the 30 dollar a barrel level if it takes rationing by the government to keep it there. Once oil is pegged all of the other commodities will line up. Speculation has to be taken out of commodities even if it takes a heavy hand by our government to do it. Traders with lots of money are moving prices up or down depending on which side they are on. This has to stop.

    Their has to be a new world of order. The G-20 or whoever has to control the float of currencies and keep them from destroying one countries currency to the benefit of another. Big companies make or break depending on the strength or weakness of a currency. It takes someone about one quarter to figure out how to move this commodity just like they move oil.

    Unfortunately the governments are going to have to spend until someone figures out how to pay people to do nothing or produce something that don’t produce a product for consumption.

    Health care for all is a great way to put people to work and spend money.

    Build anything that will produce future returns to the government. Build wind turbines, anything solar and nuclear power plants, hydro anything. Build anything that when finished and turned on will start paying the treasury back and remove the drain of dollars to a foreign country.

    Remove all taxes from the person making 30 thousand or less. This includes payroll and ss. Business will have more money to spend and so will the person who spends actually spend all the money they make. If you want raise taxes on anyone making over one million to 80 percent since they will not spend it. Any money that moves has to be spent for the time being, the next couple of years at the least. The velocity of this extra money in the hands of people who need it will be ten times faster than if it went to the treasury and then back to the people.

    Businesses have to get real. Products, cars, houses, have to be produced at a price that people who make $10 an hour can afford. That’s a car that cost 2 or three thousand dollars. It is a house in the range of 30 or 40 thousand. That’s what 95% of the population can afford to pay. Greed at the top has to go. A manager should make at most 2 or three times what you are willing to pay the worker, not 400 or 500 times the bottom. Price products that cover costs plus a reasonable return, not what the market will bear.

    The cost of money causes inflation. High interest rates are simply passed on to the consumer in the form of price increases thus causing inflation and higher prices. Control the supply of money and you control inflation. Control the deflation of the dollar and you control inflation.

    Lower interest rates and save mortgage holders, a zero principal mortgage would owe how much every month at a zero interest rate, zero. Even the person that is over their head with a $500,000 mortgage would owe less than $900 per month at 2% interest. This would fix most foreclosures and be enough to pay for any work the banker is doing on your behalf. It will not pay his 10 million per year salary but at 10 times his tellers salary he probably will be earning less.

    Interest rates around the world should be zero. Control money supply. Control build to return, quantifiable and reasonable. We have to take excess out of the system if we want growth without bubbles. Destroy GREED at all cost, greed is worse than stealing from the local bank, enact laws to put greedy people where they belong.

    We are dealing with a lot of complex issues but for the time being the governments of the world are the answer. Once supplies of houses and cars and commodities are at price people can afford again some form of free enterprise can be unleashed again. All new laws have to deal with the greed that has become so rampant in the financial markets and the corporate world. People who put their companies in jeopardy for their own reward should be put in prison with the proceeds going to charity.

  • Report this Comment On January 28, 2009, at 1:03 AM, jontec7 wrote:

    Personally, I am tired of the government and misinformed individuals allowing the banks to pass the buck on the credit crisis. The problem to begin with was a.) a lack of oversight and b.) a lack of common sense on the part of financial institutions. For example, if the financial institutions had not been allowed to sell insurance plans on these toxic, high risk assets to other institutions there would not have been such a disaster. The regulations would have allowed market forces to settle this situation when the loans fell through-- i.e. the financial institutions with the toxic assets would have been the only ones to fail. It has been the penetration and tangled web of these transactions that has cause such widespread disaster and ruin, not the inability of a small subset of the nation's population to meet skyrocketing monthly payments.

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