Tuesday, January 27, 2009

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.

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 sh
are 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.

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.

Rebecca Wilder


  1. Nice graphs, but they are current evalutions, and don't carry a predictive value.

    There are lags for monetary flows (MVt), one for real-gdp & one for inflation (& others, bonds, etc.). These lags NEVER vary.

    I.e., Ben S. Bernanke, the European Central Bank (ECB),Janet L. Yellen, Milton Friedman,
    Thomas M. Hoenig, William Poole, Robert W. Fischer, Governor Donald L. Kohn, et. al. are all WRONG:

    They all pontificate that "the transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level"

    Maybe if it didn't take 46 years to release the pertinent classified document on monetary flows (MVt), or the transactions velocity of money, these ideas would have generated greater scrutiny.

  2. Example:

    Some people think Feb 27, 2007 started across the ocean:

    "On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier".

    In fact, it was home grown. Feb 27coincided with the sharpest decline in:

    (1) the absolute level of “free” legal reserves, &
    (2) & an historically large peak-to-trough reversal of roc’s for proxies on real GDP & the deflator.

  3. Another example:

    “Black Monday" Oct. 19, 1987, coincided with the sharpest and fastest peak-to-trough decline in the roc for real GDP since 1915.

  4. Note: the numbers for reserves only work if the data is collected, calculated and reported correctly. The FED has now contaminated the series...and reserves never provided the same accuracy as did bank debits. Inaccurate economic forecasts are impossible using the debit series.

  5. Hey Rebecca,

    You're right!

    Bank lending should come to a standstill in a recessions. Yet, that should happen with solvent banks.

    TARP is nothing more than a rewards program to the most incompetent, yet highly connected major insiders of the U.S. Political / Financial Class.

    TARP never should have happened. It's a huge fleecing of everyday, street-level Americans on behalf of the foolish who believe that they are superior.

    Instead, those banks should have failed, their MZM deposits (checkbook, saving, money market) guaranteed in full and transferred to solvent banks in a random fashion.

    "Too big to fail" used to mean that a company was so big that it could never fail because it held the most market share, had huge revenues, and the like.

    Somehow that phrase of rhetoric has become a bogus "We can't let them fail because this shall cause a cascade, an avalanche of disaster.".

    Instead, Americans shall suffer death by a thousand blunders of government, of the political class, of the financial class.

  6. Hey Rebecca,

    For the sake of argument...couldn't you propose that increased lending should be expected from financial institutions who received TARP funds because it was just one of the stipulations in order to receive the $ in the first place?

    What about all the businesses that operationally depend on credit from banks? Lack of lending shuts/slows down industries...where else do they get it?

    Banks are receiving billions in tax payer dollars. For taxpayers to read reports of institutions spending their $ frivolously (corp. jets, lavish offices) is a slap in the face to consumers who depend on that bank lending (that has dried up).

    You can't blame the expectation, hence disappointment, in the lack of lending -- lawmakers decreed it would be so and it hasn't. It's all based on expectations.

    I like the post,

    Tim (devil's advocate)

  7. Tim, Were they, though? Obliged to lend, I mean.


  8. Rebecca,

    Obliged -- I'm not sure, but very much so encouraged.


    -http://online.wsj.com/article/SB123024352610834057.html?mod=testMod (of course the Journal now makes you pay to even read a story online! - seperate issue)


  9. Yup, I remember the WSJ article, and also remember chuckling to myself. Re-capitalization does not equal lending. That is not to say - as you definitely point out - what the banks have done with their funds is worthy of the taxpayers' dollars.

  10. Yes Rebecca, we can agree!

    Your work here gives many much to think upon.

    For that, I say all should give you a big round of thanks.

    Of course the right lens through which to look at economics consists of money & banking; legal economics (property, collectivist governance & its effects on liberty); and behavioral economics (human action in response to the first two).

    Yet, we can save such a chat for another time.

  11. Good point, Rebecca. I agree with you almost entirely. Banks can't lend if they receive no credit worthy loan requests.
    1) The economy won't grind to a complete halt (we hope) so normal seasonal demands for credit must still be met.
    2) If and when the government starts doling out fiscal stimulus, the contractors involved will have to borrow in order to carry out their contracts, so we'd better hope their banks are capable of lending.
    3) Bankers are notorious for over reacting to boom and bust cycles, and during a recession they are likely to turn up their noses at perfectly good credits, which they would have been delighted to book a few months before. I saw this first hand when working in a bank years ago. In this regard, the French government has appointed an ombudsman, which on appeal can review refusals to see if they are justified.

  12. Hi Farrar,

    Thanks for the comment. Point 2) is particularly good!


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  14. Amazing graph on the continued expansion of CC debt. This is a very telling chart. It's indicating that we're not even close to beginning to resolve the major issue in the economy - loose credit. We solve our problems by creating bubbles. There's no long term strategy in this country. It's just - "Throw more bucks on the fire".....sad that this is the best that we can come up with as a nation. I fear that it will only get worse.