After a couple of days of Libor dropping and Treasury yields improving, we’re all supposed to be convinced that the financial crisis is passing. Not so fast. Andrew Ross Sorkin’s column yesterday points out that banks are not likely to start lending any time soon. It just doesn’t make sense as long as their own balance sheets are a wreck and borrowers are in the midst of a broad business slowdown.
They’re going to horde the cash the government is handing them, Sorkin says.
But make no mistake, the banks are doing the opposite of what Henry M. Paulson Jr., the Treasury secretary, sought when he virtually demanded that they accept the taxpayers’ money: They are hoarding it. It’s a bit like the government’s sending out tax rebate checks and the consumers’ not immediately running out and spending them.
“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.”
Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)
But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.
“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”
Think about it. Would you lend to would-be homeowners who will likely face layoffs, stock market losses and further declines in housing prices? To corporations facing lower consumer demands? The answer is that of course you would. You’d just charge an enormous premium. Welcome to the world of Right Now.