With U.S. Economy Still on the Ropes, Where Are the Banks?

The US financial system was resuscitated by the largess of the taxpayer. Without any real quid pro quo, transparency nor discussion, they were made whole. Their losses made public while their profits were guaranteed to remain private (as the recent obscene bonuses attest).

So now that the US economy is still on the ropes, fighting for its very survival and in dire need of a liquidity transfusion of its own via the credit markets, where are the banks?

Surely they are pumping the lifeblood they received from the US treasury and the Fed back into large and small businesses that are the engines of growth to allow the economy the same recovery they enjoyed. Right? right? Well, no. In fact, if you assumed that you couldn’t be more wrong.

As you can see from the chart above, bank lending in the US has contracted to an unprecedented degree. You may notice that a contraction of some shape or form happens each time we have a recession (the dark bars). And you would be right. But we are not taking a random walk down Wall Street these days. These are extraordinary times, which required extraordinary measures - whether rightly or wrongly.

So what are the banks doing with all the cash they received from the hard working American Joe and Jane Sixpack?

Hoarding it like a miser:

So we have banks flush with cash, not lending to those who need it and deserve it, but rather sitting on the cash or in Goldman’s case, using it to generate billions of dollars in profit which then is promptly cut in half to be paid as bonuses.

As David Rosenberg of the Toronto boutique firm, Gluskin Sheff posits, this may be why the US government bond market is so subdued:

The banks are deploying the cash in the government bond market, buying a net $27 billion in the latest week and $130 billion in the past 18 weeks. Meanwhile, cash reserves keep piling up and just reached an all-time high of $1.2 trillion — enough to finance the entire U.S. fiscal deficit. This is a nice back-of-the-door mechanism for how the Fed is monetizing the government’s endless need for money: bolster reserves at the big commercial banks and have these banks buy the bonds that Uncle Sam sells in order to raise the capital needed to fund all the government’s fiscal stimulus measures.

Here is a very long term chart of the US 30 year bond yield:

Comments

[niemi:]

Where on earth do you see bad behavior rewarded like we saw in the recent meltsown of our financial markets? I once worked for Norwest Bank now Wells Fargo. Our local bank, on the direction of corporate shut down lending to the local depositors , but we took that money and made BIG loans to south America.  Later we charged those loans off as uncollectable and maintained an inflated interest rate to recoupe losses.  Just remember this is not their money and since Ronald Regan,starting with the repeal of the  GlassStegale Act for deregulation , and the idea banks can govern themselves, because they know best.  The rest of the citizens of this country operate under laws, why do we think corporations don

Oct 28 10:31 AM

[CoolChapRaghu:]

see .... as common sense suggests, a family hoards grains when it feels/sees a draught or famine coming .. they are afraid of the fact there may not be enough later.. On the extention of same logic, I believe , if the banks are hoarding cash of such amount, they are afraid of some thing... the question is .. what is it that they are seeing and are so afraid of it ... as I read many reports and columns on seeking alpha that house prices are rebounding, I am unable to guess what is it they are afraid of so much !

Oct 28 10:43 AM

[nprfreak:]

Where are the banks? At least one of them, JP Morgan Chase, seems intent on insuring that the economic recovery is slowed while they "get theirs". Many may think anyone with credit card debt deserves whatever they get but should consider that many small businesses and self-employed folks float their business with credit cards. And consider that perhaps taking a 3.99% "for the life of the loan" offer from Chase may have been a wise decision based on other circumstances. Even letting a 7.99% fixed rate APR card with a 10 or 20 year history run a balance for a period may not have been irresponsible.

Chase has decided to punish their most responsible card customers: those who never paid late or exceeded their limit so as to put them in range of the abusive and usurous "default" rate. With their overall interest rate increases and raising minimum pays from 2% to 5% on certain card accounts, they seem to be hoping to push more people into "default" rates that are now approaching 50%!!!

What are they thinking? It makes no sense to me but they clearly want their money NOW whether that means losing customers (those who can pay off or get other credit in this environment). They are abusing those with the best credit history the most because they THINK they are least likely to default.

I think they are wrong. I myself am very close to doing the unthinkable and defaulting on my two low rate CC loans with them. They have pushed me to edge of insolvency and you can bet I'm not going to pay them before my mortgage and food.

Meanwhile Mr. Dimon is on a PR campaign to paint them as the hero of the day. True, they paid back their TARP money. But based on how they are treated their Chase customers (most acquired from other companies, WAMU most recently through Bank One near the turn of the century), they did that way too soon.

Mr. Dimon talks about "too big to fail" provisions. JPM is clearly that. It is my hope that the feds break them up BEFORE they put the system at any further risk. They should not be permitted this back-door method of keeping the economy down while floating their bank and CC operations on the investment banking divisions.

Two illuminating websites:
www.changeinterms.com/
www.consumeraffairs.co...

Clearly not everyone on the 2nd site is completely "clean", a few are pretty clueless, but most are and the list is just HUGE.

So at least the Chase part of JPM Chase is right in the middle of getting theirs regardless of the damage they might do to the broader economy. May the get their just reward! I'm pretty sure no one I know will ever do business with them again.

Finally, a recent CNN story. Chase has been pretty successful at squelching much of the negative press on this situation even (apparently) getting a Suze Orman interview with Debtor's Revolt Ann Minch of You Tube fame). A few outlets (like CNN, Consumer Reports, and The American Bankers Association) have resisted the pressure. This whole thing started in January and I am personally astonished that it continues to grow so steadily.

www.cnn.com/2009/POLIT...

Oct 28 10:52 AM

[Marbani:]

Something is missing....how come buying Treasuries at nearly 0% yield results in huge profits for hearding banks?

Oct 28 11:00 AM

[bluesky123:]

while our banks are lending to nobody, China announces today it is investing 3 Billion RMB into small and medium sized companies to boost "their innovation capability, energy saving and emissions reduction". China business is on the move while US business can't get money to buy inventory.

www.chinadaily.com.cn/...

Oct 28 11:54 AM

[greedcanbgood:]

What a complete bunch of hogwash. Let’s see, first of all not ALL banks required assistance and yet it was forced down their throats and then followed up with a bunch of ex post facto rules. Second, do more homework. Consumer and business appetite for credit is at an all time low. Third, financial institutions have taken a serious beating for assuming too much risk (including lending risk) and yet now, here you (and congress) decry their unwillingness to lend. It's like the master who beats his dog when he feeds it and then wonders why the dog is reluctant to eat. Fourth, pending legislation may place de facto price controls on some consumer credit and fee income streams for banks without regard to the ramifications to the financial services industry. Clearly, they are trying to be prudent with cash in preparation for the coming storm.

Oct 28 01:19 PM

[E Nuff Sed:]

If I could borrow at 0% and get a 4% return for no risk I would do the same. Basically with "mark to market" is suspended - the government is slowing is slowly inflating the bank while hoping that the economy improves.

Oct 28 09:40 PM

[enigmaman:]

As the economy was in melt down mode back room deals were struck between the WH and WS bankers, the meeting they had in private put into place the schemes that were needed to build up the balance sheets of the banking system, to stabilize the markets and restore confidence to the American people. Of course it would come at a price, the bankers would not lend, helping main street was never their objective, that would be left to the government to do. The government would win on both fronts because as the old saying goes "you dont bite the hand that feeds you"

Oct 29 07:58 AM

[enigmaman:]

yes, but you cannot, so while the bankers make hay while the sun shines on them, the heart of America is being eroded, when the time comes that the economy finally does turns positive for fundamental reasons what will it look like? As you say they "hope that the economy improves" in any event whether it does or doesnt the debt and any resulting mess will be left for middle America.


On Oct 28 09:40 PM E Nuff Sed wrote:

> If I could borrow at 0% and get a 4% return for no risk I would do
> the same. Basically with "mark to market" is suspended - the government
> is slowing is slowly inflating the bank while hoping that the economy
> improves.

Oct 29 08:05 AM

[KirbyJF1:]

So you think we should go back to lending to anyone with an idea & not based on the ability to repay the loan. Possibly with that splended thought process possibly you belong in congress. What a dweeb


Kirby

Oct 29 08:30 AM

[jackooo:]

Obama said he would give us change...but I rather have the paper money.

Oct 29 11:30 AM

[E Nuff Sed:]

I said if I could I would and so would you.
Patriotism is the last refuge of the Scoundrel.


On Oct 29 08:05 AM enigmaman wrote:

> yes, but you cannot, so while the bankers make hay while the sun
> shines on them, the heart of America is being eroded, when the time
> comes that the economy finally does turns positive for fundamental
> reasons what will it look like? As you say they "hope that the economy
> improves" in any event whether it does or doesnt the debt and any
> resulting mess will be left for middle America.

Oct 30 09:39 AM

[b3rkut:]

Can you name which banks were forced to accept assistance?

Thnx!


On Oct 28 01:19 PM greedcanbgood wrote:

> What a complete bunch of hogwash. Let’s see, first of all not ALL
> banks required assistance and yet it was forced down their throats
> and then followed up with a bunch of ex post facto rules. Second,
> do more homework. Consumer and business appetite for credit is at
> an all time low. Third, financial institutions have taken a serious
> beating for assuming too much risk (including lending risk) and yet
> now, here you (and congress) decry their unwillingness to lend.
> It's like the master who beats his dog when he feeds it and then
> wonders why the dog is reluctant to eat. Fourth, pending legislation
> may place de facto price controls on some consumer credit and fee
> income streams for banks without regard to the ramifications to the
> financial services industry. Clearly, they are trying to be prudent
> with cash in preparation for the coming storm.

Nov 03 04:51 PM