Why Aren’t Banks Lending? They Are Being Rational

President Obama met with a dozen small banks yesterday, urging them to keep lending.

He did not have to tell that to this group — about 6500 mostly AAA rated, regional and community banks — who have been happily lending away. Its how they earn their money.

The larger banks, on the other hand, are the ones who have cut back lending dramatically. This is especially true of the 10 biggest banks.

Why?

Its the rational thing to do.

These banks STILL have to much debt, too little capital. They books are festooned with bad loans, which, thanks to our corrupt Congress, they no longer have to disclose appropriately. Thanks to Mark-to-Make-Believe, they can pretend these assets are worth near what they paid for them. In reality, they cannot sell them even at 50% off.

Lending money is a risky business; there is the possibility of loss. Under-capitalized banks cannot take that chance. By not lending, their capital base goes up. IT is the rational thing to do from their perspective.

Rather than engage in traditional money lending, these banks have decided to simply borrow from the Fed at 0%, and make risk free loans to the Treasury at 3%.

And, these banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND.

Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios.

This is yet another unintended consequence of bailing out reckless bankers from their own folly. Their place in the economy has become so distorted as to become nearly economically meaningless . . .

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