TARP was passed months ago.  It was originally pitched to Congress and taxpayers as a means to buy the bad loans away from banks.  The government would then work with the borrowers to sort out the bad stuff and the banks would be free to lend again.  Instead the Treasury is using the money to buy equity stakes in the banks.  The banks now have the cash to loan out to us again.  So the question is:  Why aren’t the banks lending to us like they were told to do?  The answer is simple…

Where did all the money go?

The answer does not necessarily lie in the “they aren’t legally obligated to” category that even I have alluded to.  This was the idea that our brilliant Congressional leaders failed to require the banks to do anything with the money once they got it.  The money can be used for three primary purposes:

a) Hoard the cash as capital on the balance sheet (makes you look stable)
b) Buy other banks
c) Lend it

I’m sure you’re on the edge of your sheet wondering which one most banks are doing.  Though many banks have been buying, most are hoarding the cash and not lending it.  So we must blame the banks for sitting on the money and keeping the economy in purgatory then.  No.  What if I told you though that the banks WANTED to lend it but someone wouldn’t let them?

Well Congress authorized the TARP money, so who can keep the banks from spending the TARP money?  Congress of course!  Since fall of 2007, government leader have been calling for tighter regulating of lending practices.  The FDIC, Federal Reserve, and Office of the Comptroller are all feeling the pressure from Congress to bear down on the banks more.  I read an article the other day where such an example was cited.  A small bank that serves less than 10,000 customers has a history of issuing reliable loans for Harley Davidson motorcycles.  It seems the customers almost always make their payments on time.  But because of the economy, and governmental pressure, the bank can no longer do loans for Harleys.

Now scale that up to big banks that serve millions.  I work for a profit seeking corporation.  Because of that I’m at risk of getting laid off during this recession.  Even though my salary is sufficient, I have tons of cash, mortgage rates are at historical lows, and I’m buying a conservative home; because home values are still declining and I’m a layoff risk the bank probably can’t give me a loan even if they wanted to.  I’m not looking for a house right now, but this is happening all over the country.  Our government gave the banks the money to lend to us, but at the same time won’t let the banks lend the money to us. This is exactly why we’re so screwed.  This is why I’m anti-government.  I can’t even say the left hand doesn’t know what the right hand is doing, because it’s the same hand doing both things!

Government has always done an awful job of helping the people.  Their intentions are always in the right place, but their goals are never realized because of crap like this.  The banks have lost so much money on all these bad loans, do you think they will continue to make bad loans?  No way.  The bankers will be mad because they make less sales; but I can tell you (because I work at a bank) that the guys back here monitoring the risk will not let the bankers make bad loans anymore.  We can’t afford to take the risk.

So please government, from the bottom of my heart, trust our banks to do the right thing for once.  Actually you don’t even need to trust us.  All you need to know is that for the first time in a century, the goals of the profit seeking banks and the goals of the people are ONE IN THE SAME.  We don’t need the micro-managing tactics you’ve adopted.  If you want to continue to breath down our necks then by all means, no one can stop you.  But take back the money you gave us so you can’t blame the economy on the banks anymore.

Read

The linked article was the inspiration for this post, but their angle is not the same as mine.

I acknowledge that most of my rant is speculation at best.  Even though points line up with my opinions, we could be missing something.  I can only go based on what I’ve been reading, the actions of Congress, and the water cooler rumblings in the office.  There are gaps to my own argument though; if this really is the case the banks should be stepping up and telling Congress to back the flip up for a hot minute and let us do our thing.

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics.

categories: banking, economics, government, loans