The latest from my anonymous bank CEO:
The question is not “Why aren’t the banks lending?”, but “Why aren’t qualified borrowers borrowing?”
The reason there was so much lending over the last few years was a worldwide liquidity glut that was searching for yield. The tremendous generation of mortgages that were put into securities and sold to the market was in response to the demand by a lot of offshore investors with dollars to invest. The demand for mortgages and other investment vehicles resulted in credit terms being significantly reduced in order to generate more supply.[# More #]
When investors found out that the credit ratings were bogus and they would incur significant losses, they stopped demanding such investments and bought US Treasury Notes instead. Savers and investors alike changed their attitude from return on capital to return of capital.
Bankers who keep loans on their balance sheets have generally been conservative on credit terms. The tremendous competition from alternative sources of lending forced bankers to reach for loans on weaker terms (private equity buyout loans) or in areas where there was little competition but more risky like residential land and development loans. Providing more capital and/or deposits for lending will not work if there are no qualified borrowers. Lending to weak borrowers is what got us into this mess.
Lending will increase when investors and entrepreneurs are more optimistic about the future. Good economies are created by optimism. After WWII everyone was optimistic that the war was over, soldiers were returning home, getting married, having children, building houses, and going to work. The economy rose.
Reagan was an optimist, people saw a brighter future, and the tax cuts helped a lot. The economy went up.
The end of the Cold War and the beginning of the internet era along with huge technological productivity advances ushered in an era of strong economic growth.
We need to feed people’s optimism. They need to see opportunities that generate profit. Areas like nanotechnology or biotech generate excitement. Tax incentives work because investors are rewarded for their investment. Once optimism returns, there will be strong and qualified demand for capital and loans. People don’t borrow when they are fearful, only when they see good things happening to the money that are risking.
Some good things are happening. The TALF facility announced by Treasury and the Federal Reserve last week will help. It will provide liquidity for auto loans, student loans, credit card loans, and SBA loans to small businesses. Borrowers will need to have good credit so the loan packages can obtain the highest credit ratings. If asset classes can be expanded to include commercial mortgages and other equipment purchases that will help even more.
On the other hand the “Making Home Affordable” Modification program may not help. The devil is in the details which go on for 17 pages. It will be a nightmare for lenders and servicers to properly qualify borrowers and be sure the documentation conforms for government assistance. I am afraid there is going to be a lot of confusion and disappointment about this plan.
One more thought … FDIC Chairman Sheila Bair sure knows how to incite a riot. First she tells us bankers that in the middle of a crisis we need to ante up 20% or more of our earnings to cover FDIC payouts. Then says if we don’t the fund will be insolvent! Let’s spread fear and panic among depositors to get your way. I had calls from depositors asking if it would happen. Fortunately things have calmed down and both Fed Chairman Bernake and Warren Buffett suggested that requiring a special assessment now is not helpful. (Banks, not taxpayers, have always provided the funds for FDIC bailouts, but it makes sense to spread the payments out or borrow the funds like was done in the 1980′s.)
My email is firstname.lastname@example.org
I receive a great deal of positive e-mail about both Baker Guy and my anonymous ad exec Bear in the Woods. My belief is that the credibility of MSM has been so badly damaged by the cheerleading for President Obama that clarity from any non-MSM speaking directly to an audience is greatly welcomed.