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
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.