Our politicians are lamenting that lending is currently too slow, and if more lending occurred then we would pull right out of recession. They blame the banks for not lending out the billions of taxpayer dollars that were used to purchase preferred stock in many of our largest banks (“Tarp” funds). This is a myth.
- When most Americans and politicians speak of a “bank,” they are referring to what is known as a “commercial” bank. That is, a bank that takes in deposits and then lends those deposits out to borrowers. Commercial banking only accounts for about 25 – 30% of the entire lending in our economy! The securitized loan markets and bond markets account for the majority of all lending that takes place. When we look at the outstanding loans on the books of most commercial banks, we see that their loans are increasing or stable; not decreasing. Therefore, in this sense, the “Tarp” money is being lent out.
- The contracting parts of the lending markets are the securitized loans and bonds.
- The bond market is naturally slow in a recession with companies hesitating to take on new debt when economic conditions are contracting; most companies seek to actually reduce their debt during these economic times. In addition, in tough economic times, corporate bond yield spreads over government bonds tend to increase because of additional perceived risk. Therefore, if a company does want to issue bonds, they will need to offer a rate that they may deem too expensive, and just postpone their bond issuance to a more favorable environment in the future. “Tarp” funds never went to the bond market.
- The securitized loan market is the main lending market that was “frozen” because of the bursting of the housing bubble. This market is beginning to thaw a bit, but is far from being robust. The major mortgage players in this market are FannieMae and FreddieMac, which the government has already taken over, but “Tarp” funds were not used for this government takeover.
- The notion that anyone can get a loan is now dead, and will hopefully stay that way. Proper credit standards are, once again, being used to determine if a loan is granted to an individual or company. Those that do not meet normal good credit criteria do have problems securing a loan, which is as it should be. And yet, commercial banks still have outstanding loans increasing!
- During recessions, borrowing naturally contracts and savings rates increase, both of which are currently being seen in the published numbers. This business cycle tendency allows the economy to de-lever a bit to prepare for being able to borrow more as the economy becomes more robust after the normal downturn. Again, this is natural business cycle activity.
- Creditworthy individuals and businesses are the first to recognize when it is time to reduce their borrowings, and they have responsibly done just that; resulting in slowing loan demand throughout our economy. You can’t make loans to people who do not want them; “Tarp” funds or no “Tarp” funds.
These are just a few of the reasons that this financial crisis myth must be considered debunked.
Thomas J. Alexander, Associate Professor, Chair Banking & Finance, Northwood University, Midland, MI