Sign of a Troubled Economy

Includes: KBE, XLF
by: Michael Panzner

After the events of recent years, many people probably feel we'd be much better off if we shut down most, if not all, of the banks and forced their employees to seek a more productive line of work. But the truth is that every community depends to some extent on financial intermediaries, and even if the anti-bankster crowd got their wish, the void would eventually be filled by similar enterprises. With that in mind, it's no stretch to assume that a troubled banking system is also a sign of a troubled economy, as Barron's Jim McTague suggests in "Main Street Needs a Doctor":

Small banks' delinquencies cast doubt on Main Street's recover

MAIN STREET NEEDS A DOCTOR. Its pulse, unlike Wall Street's, isn't quickening. The Great Recession drags on there like some drug-resistant bacteria. This is disturbing, because Main Street's small businesses generate substantial job growth, which is what the anemic economy sorely needs. All bull runs in the market are suspect until Main Street conquers its malaise.

The latest evidence of Main Street's funk comes from a Treasury report listing banks that are unable to pay dividends on money extended to them under the Troubled Asset Relief Program, or TARP. These are banks that the regulators handpicked as probable survivors of the financial meltdown, which has claimed 260 institutions since 2008.

The government in 2008 purchased $204.9 billion of preferred stock in more than 700 banks so they would have sufficient capital to make loans at a time when the credit markets nearly had frozen solid. (Another $331.7 billion in TARP funds was invested in car makers, American International Group (NYSE:AIG) and other programs. I'm limiting the discussion here to banks).