Why aren't banks lending? (Because bureaucrats and politicians won't let them)

Washington Times ^ | 06/09/2010 | Todd Zywicki

[SeekAndFind]

Despite constant urging by Washington for banks to increase their lending, credit conditions remain tight. Small-business lending continues to lag, and credit card issuers have slashed credit lines and canceled thousands of accounts. Just before Memorial Day, the Obama administration unveiled its latest effort to jump-start lending, a new Small Business Lending Fund (SBLF), which will make available $30 billion to community banks to promote small-business lending. The proposal already has cleared the House Financial Services Committee.

But is there any reason to believe that this modest investment will do what the hundreds of billions of Troubled Asset Relief Program (TARP) dollars failed to do - namely, encourage banks to start lending? Not likely. As with previous efforts, the new fund fails to address the most important reason banks aren't lending: Washington bureaucrats and politicians are making it impossible for them do so.

Every loan bears some risk that it will not be repaid. In making a loan, a lender has two considerations: First, it must be able to price the risk of the loan accurately or, second, it must reduce its risk exposure by reducing the number of loans it makes, the amount it lends or the risk profile of those to whom it lends. Regulations that interfere with the ability to price risk accurately thus inevitably produce efforts to reduce risk exposure by curtailing lending.

Since President Obama was inaugurated, Congress has launched one of the most ambitious legislative agendas in American history - proposals that would fundamentally transform the economy: from remaking the health care system, to a far-reaching set of taxes and regulations to combat climate change and remake the energy system, to a comprehensive financial overhaul bill that would fundamentally reshape the banking system.

[SeekAndFind]

How, one wonders, can borrowers and lenders possibly price the risk associated with the imposition of the massive new cap-and-trade system or other new environmental regulations? How could a start-up or growing company anticipate the costs to be imposed by the health insurance reform legislation? How can a lender make a loan today knowing that a new Bureau of Consumer Financial Protection or state attorney general might later decide the loan is "abusive"? Or what future taxes will have to be levied to fund our unsustainable budget deficits?

They can't.

[Daisyjane69]

Because they are getting a better deal (with far less risk) by operating through the overnight window and T-bonds, than these poor asshat depositors earning 1.75% interest on a $ 35,000 CD.

When the gov’t competes against the private sector, gov’t always wins. Because they set up the structure, the incentives, and the rules.

[Rational Thought]

One thing for certain; The Government intervention has ruined the housing market.

Economists like to predict when the housing market will turn around. I wonder IF the housing market will EVER turn around?

[Nick Danger]

Because they are getting a better deal (with far less risk) by operating through the overnight window and T-bonds, than these poor asshat depositors earning 1.75% interest on a $ 35,000 CD.

A bank that bought a Treasury bill anytime this year earns an interest rate below one-quarter of one per cent. Please explain how that is a better deal than the "poor asshat depositors" are getting.

[org.whodat]

Anyone with good credit can borrow money, it's just the fly by nights that cannot get fund.

[Nick Danger]

I wonder IF the housing market will EVER turn around?

Good question. A lot of the housing boom was driven by simple demographics: two large generations (Boomers & X-ers) buying houses in which to raise their children. While both of those generations replaced themselves, neither caused any population growth. So when the boomers started to sell the 4-bedroom 'kid raising' houses to move into condos on the golf course, the generation coming along to buy them was no larger than the generation selling. This is going to continue. Every new house that gets built is another 'used' house that declines in price, because there's no new demand coming in.

[Daisyjane69]

I don’t have the numbers at my fingertips, but the problem mostly is alleged to lie at the overnight window. The T-bills, according to what I’ve read, is merely icing on the cake.

If you consider “icing on the cake” to be about 3% or less.

[Texas resident]

There is still a huge amount of debt floating out there from the congressional mandated loans to deadbeats. All that debt is backed up in the basic material industries that supply the housing industry. Cement, lumber, applicances and on and on. There is a dangerous game of musical chairs going on and when the music stops, the guy left standing will get hammered. Congress is only making sure that the music is still playing.

[Nick Danger]

I don’t have the numbers at my fingertips, but the problem mostly is alleged to lie at the overnight window. The T-bills, according to what I’ve read, is merely icing on the cake.

You don't have any numbers, your allegations come in the passive voice ('is alleged to') from sources unknown, and the rest is from 'what you've read,' also from sources unknown.

Here's an idea: why don't you quit while you're ahead? I already told you T-bills are earning a quarter of a per cent (and I know this because -- unlike you -- I bothered to look it up) and you still come back talking about "3% or less."

I doubt that you can explain what this problem is that is alleged to lie at the overnight window, but please... give it a shot. We're all dying to find out what problem is lying at the overnight window.

Should you try to BS your way out of this by spewing buzzwords like 'convertible subordinated debentures,' your entire house will fill up with giant palmetto bugs.

[dragnet2]

Screw the corrupt banksters...

In the past year, they have actually contacted my by phone, want to lend money, help refi etc... I told them I'd rather juggle chain saws than borrow from them and pay their loan shark interest rates..

Screw them into the ground.

[SeekAndFind]

If people can’t sell their houses, then why would companies build more? And who are banks going to lend to ?

The housing sector is very weak. This tells me people aren’t buying what others want to sell.

The government sure doesn’t’ like deflation. That’s because if it happens, and continued happening, the government is bankrupt. Reason being the dent itself doesn’t deflate.

The citizenry money supply is shrinking. the government money supply is rising. Who’s going to win? It depends on how many tea party candidates get elected.

Here’s the paradox however. If the tea party takes control of the Senate and Congress, they will bankrupt the government. And...... that’s a good thing. Because the US is already bankrupt.

There is about $45,000 in “money” for every US person, and $180,000 in debt. The only way to create new money is through debt. I am not sure if you know this, but since the Fed was created in 1913, the US has essentially been running one big credit card, and increasing the credit limit, and making minimum payments with cash advances from the credit card. Then they inject those cash advances into the economy, and you’re supposed to thank them for it.

Individuals can get out of debt, but a society cannot using a fiat currency since money itself is debt.

Even the tea parties don’t know how this works. And, you can’t run for election saying you’re going to cut spending, and then shrink the money supply and then bankrupt the government as a result since it would take 100% of revenues to make the interest payments on the debt. But, the faster the US can go bankrupt, and tell all the bond holders “sorry ‘bout that”, the better.