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The Wilder View

This is a recession; bankers shouldn’t be forced to lend

My impression of the TARP re-capitalization program was that of an emergency government effort to keep banks from being forced to write down capital losses and risk insolvency. I don’t remember reading it as a “forced lending program.” This is a severe recession; it is an environment where big firms announce 71,400 new job cuts in one day, and not an environment for new loan origination. That would be completely irrational.

total_loan_chart.png

The chart illustrates total monthly bank lending growth since 1950. Bank lending comes to a standstill in recessions. In the last two months of 2008, bank lending fell $104 billion, or slowed to 5.6% growth over the year. That makes sense.

Yesterday, the Wall Street Journal made a splash, reporting that lending has declined for the top beneficiaries of TARP funding: Lending at many of the nation’s largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.

Ten of the 13 big beneficiaries of the Treasury Department’s Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.

Those 13 banks have collected the lion’s share of the roughly $200 billion the government has doled out since TARP was launched last October to stabilize financial institutions. Banks reporting declines in outstanding loans range from giants Bank of America Corp. and Citigroup Inc., each of which got $45 billion from the government; to smaller, regional institutions. Just three of the banks reported growth in their loan portfolios: U.S. Bancorp, SunTrust Banks Inc. and BB&T Corp. TARP definitely has its problems, but it was developed to prevent a systemic crisis, and not to force lending. Were it not for TARP, more banks may have failed, and lending would be negligible, if not falling precipitously.

The government should allow the bankers to make rational lending decisions, and right now focus its efforts on keeping the banking system afloat. And later, in the resolution phase of the banking crisis, the government should focus on the actual availability of credit and regulation (the flow of lending). If the resolution phase of the crisis occurs sooner rather than later, the economy will start to mend, and bankers will eventually lend again…without the forcible hand of Congress.

A necessary condition for an economic recovery is not a fully functioning credit system, but rather the other way around. In order for the credit system to heal, it must be on firm economic ground.

More on credit: new-loan origination has likely stalled, but consumers continue to draw on revolving lines of credit.

consumer_loan_chart.png

I thought that credit-card balances would start to fall with revolving credit, but no. Credit card lending has hit new highs: Q4 2008 lending averaged an annual growth rate of 12.%, which is 5% greater than the 2000-2008 average growth rate (7.6%). This can only mean that consumers are charging an increasing share of their weekly expenses onto a credit card.

This could make sense with the massive job loss over the last year, but that is not always the case (at least since the first data point in 2000). During the period of “jobless recovery”, the almost two years of rising unemployment after the 2001 recession ended, there was a reduction in consumer revolving credit growth; it hit a low of -4.9% in April 2003. Amid weak labor market conditions in the early 2000’s, credit card balances fell.

Too many people have too many credit cards; this needs to change. Default rates will rise further, and credit-card lending will eventually decline. But until that happens, I expect this series to continue to grow, as the mass layoffs slash disposable income, and consumers draw on available resources in order to smooth consumption.


Originally published at the News N Economics blog and reproduced here with the author’s permission.

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