No New News: Banks Won't Lend Money

Despite getting cash from the government, banks aren’t lending more money. It makes a good headline, but it does not have any shock value. Why would anyone be surprised?

According to The Wall Street Journal, "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."

The banks put forward the compelling argument that in a recession there is too much credit risk. What they do not admit so readily is that they may need the cash to offset more losses from the pools of toxic assets, consumer credit, and LBO loans that they hold.

The federal government has three courses it can take to rectify the problem: 1) to force banks which get federal funding to loan out a portion of the money and risk defaults on those loans, 2) allow financial firms to hoard the cash because they will need it to stay in business, or 3) a combination of the two which would substantially increase bank aid from the government giving the largest institutions in the industry such huge injections of capital that they could afford to take loan risks and protect their balance sheets.

It is beginning to look like the $350 billion balance of TARP funds will not be nearly enough.

Douglas A. McIntyre