A Look at Liquidity: The Real Reason Banks Aren’t Lending
[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]
By Don Miller
Associate Editor
Money Morning
Since the Obama administration took office almost 100 days ago, it has repeatedly said the key to an economic recovery is to unfreeze the credit markets and increase bank lending.
So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.
Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.
Meanwhile, the banks’ perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government’s ability to revitalize the banking system.
Bank Lending Still Anemic
Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn’t accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation’s big banks dropped by 23% from October to February.
According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported. In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.
For its part, government officials say the current situation could have been a whole lot worse without TARP funding.
Just last week, the U.S. Treasury Department praised “the relatively steady overall lending levels.” Without those capital injections, “lending would have suffered a far smaller total volume of loan originations in February than January,” the Treasury Department said.
But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks’ willingness to lend.
JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%. But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, “despite the fact that loan demand has dropped dramatically.”
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Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.
The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February’s lending went to consumers, up from about one-quarter in October.
But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.
Increased Savings Rate Could Slow Rebound
Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.
U.S. households nearly doubled their outstanding debt to $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.
But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.
In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95 trillion to $2.56 trillion in January.
But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.
In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.
Banks and Obama Still Not Out of the Woods
Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.
JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.
Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.
The most immediate expense may come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 largest banks. The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.
That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.
In order to avoid another capital infusion, the government might elect to take equity in return for previous loans. Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.
Of course, converting those loans into common shares would turn the government into the bank’s biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.
While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such “socialist” tendencies.
[Editor's Note: When Slate magazine recently set out to identify the stock-market guru who most correctly predicted the stock-market decline that accompanied the current financial crisis, the respected online publication concluded it was Martin Hutchinson, a veteran international investment banker who is one of Money Morning's top forecasters.
It was no surprise to our readers: After all, Hutchinson warned investors about the evils of credit default swaps six months before the complex derivatives did in insurer American International Group Inc. Then last fall, Hutchinson "called" the market bottom.
Now Hutchinson has developed a strategy for investors to invest their way to "Permanent Wealth" using high-yielding dividend stocks. Indeed, he's currently detailing a strategy that will enable investors to make $4,201 in cash in just 12 days. Just click here to find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor.]
News and Related Story Links:
- The Wall Street Journal:
Bank Lending Keeps Dropping
- McKinsey Institute:
Will U.S. Consumer Debt Reduction Cripple the Recovery?
- Federal Reserve Statistical Release:
G.19 Consumer Credit
- Zero Hedge:
JP Morgan Sees $400 Billion More In Bank Losses
- Money Morning:
The Top 12 U.S. Banks: From Zombies to Hidden Gems
- Money Morning Look at Liquidity Series (Part I of II):
A Look at Liquidity: Venture Funding Hits 12-Year Low Amid Cold IPO Market.
Comment by Billy Peterson on 23 April 2009:
Sirs:
A case can be made that your financial problems are not GM’s, but the fault of the Government. 70 years ago Henry Hazlitt in “Economics in One Lesson” wrote “In the long run imports and exports must equal each other” (pg 40), and “The government cannot keep piling up debt indefinitely; for if it tries, it will some day become bankrupt.” (pg 85). Imports now have gotten so far out of hand; the U.S. no longer makes and supplies much of its needs. This won’t work. Vehicles are fundamental to the U.S. Our automotive industry now must make a transition to nuclear-hydrogen vehicles. For many reasons, it would be extremely wrong to have foreign car manufacturers make that transition for us. Our big 3 have served the U.S. well, we need to have them continue. And there must be limits. Imports cars cannot exceed what the big 3 export.
It’s not a banking, housing, or stock market problem; we have an unworkable international commerce situation. For interior commerce our Government must maintain a level of money in our economy to maintain a level of liquidity. With the imbalance of trade so far out of whack, a trillion dollars a year is being taken out of our economy which money has to be regularly replaced. Most of our problems relative to this are automotive industry associated.
93 other countries produce oil that the U.S. imports. The U.S. imports two dozen makes of cars that are manufactured abroad. Isn’t it obvious that something is very wrong when 90% of the world’s fuel and cars are produced abroad while 90% of the World’s oil and car market is the U.S.? This cannot work. America gets oil and burns it up, and imports cars and turns them to junk So the U.S. ends up with nothing as the rest of the World has all of our money, and we still owe much more money than we have.
What is still worse. I believe that I can make a case that the import purchasing of foreign vehicles are costing three times the price of the vehicles. The first cost is the purchase of the vehicle, which consumer money goes abroad to pay for the foreign labor to make it. Then that money has to be replaced in the liquid economy. So the second cost goes for the Government’s infusion of the money required to replace purchase money from the resulting imbalance of trade sales. For argument, say U.S. consumers put $100 billion with Japan and Germany for cars. That money was needed for commerce in the U.S., so the Government has to infuse $100 billion into the economy. The third cost is the monies being paid to the support and maintain a U.S. unemployed sector who should have made the vehicle in the first place. Challenge this if you want?
What has been happening can’t continue. See the chart on United States National Public Debt on page 3 of the attached Energy and Capital article “The Great American Debt Machine.” My Operations Research Economic Model shows that imbalance of trade becomes deficit. At every level, from individual, household, business, county, state, to the whole nation, the production in that entity has to be as much as the entity’s consumption. Product and services can be traded, but trading must balance. At the national level, U.S. trade is a trillion dollars per year out of whack, the U.S. deficit. Many nations are now in the same trouble.
Each nation must fix this for itself by the DRI Rules.
Comment by RFDLPA on 23 April 2009:
TO: Don Miller; Associate Editor.
A Look at Liquidity: The Real Reason Banks Aren’t Lending
Why don’t you take a look at the way Banks work…
Specifically at the Fractional Banking system eveyone uses.
Banks work lending up to 9 tines every real dollar they have, when uncertainty shows up, they all run to grab all they can, to cover their ass.
They are not lending because they are scared, they don’t have money to respond for what their GREED and the system got them into.
They have too much money in the streets, and no assets to respond for that, no mater how much money the government gives them, they will still hoarding it.
Am I wrong ? besides, I know that things are not so simple, but isn’t that one of the main reasons, why nobody talks about this.
We look with horror at the corruption in the third world countries, and are not able to see the corruption in our country disguised as a greedy financial system, but at the en they are both the EXACT same thing, instead of corrupt military presidents we have Wall street and the big ones behind, the Rockefellers, Rothshilds, Morgans and several more, all they way down the corporate ladder and their peers, the whole world is in their hands; the government is just another puppet in their hands.
we are doomed, unless the truht in tha hands of the world sets us free.
I know that you just may delete all this with a click of your mouse.
But before you do it, just simply consider watching the first 5 minutes of a documentary called
“The money masters” made in the late 90’s, and I wonder how this guys knew what was coming
http://video.google.com/videoplay?docid=-515319560256183936&ei=S7zwSeXqN5j-rAL8sMGqCw&q=the+money+masters+full
and Please if you can give us a little feedback on their theories… are they true.
Thank you.
Robert DeLaPlaza
rdelaplaza@gmail.com
Pingback by Controversial Stress Tests Reveal Only One Bank Needs Capital, but Worries Remain on 27 April 2009:
[...] (borrowing) was not adversely affected. As a Money Morning special report detailed last week, the credit markets don’t seem to be loosening up: Lending dropped by more than 20% from October 2008 to February 2009, despite initiatives to [...]