TARP Banks Tighten Credit and Shadow Banking System Remains Broken
Posted by Michael A. Kamperman on June 2, 2009
The GM news has dominated the headlines, and rightfully so. But GM is a symptom of the crisis, not the cause. The cause of the crisis is the collapse of credit all over the globe. The shadow banking system is broken because the asset-backed securities market that relies on AAA ratings is broken. The U.S. economy is dependent upon the commercial banks to increase lending and absorb a portion of the credit market share that belonged to the shadow banking system. However, recent data that has gone under the media radar indicates all of the banks that received TARP funding from the federal government saw a combined 3% decrease in lending in March. This follows on a 2% decrease in lending in February from the 19 largest banks in the country that received TARP funding. Credit remains extremely tight, even today. Mike Jackson, the CEO of Auto Nation, stated that 65% of buyers coming into the showroom with prime credit are qualifying for a prime auto loan, and only 10% of subprime borrowers are qualifying for anything. A year ago, 95% of prime borrowers were able to qualify, and 50% of subprime borrowers could obtain an auto loan. This pattern of tight credit is true for other consumer loans and for commercial loans.
While the TARP prevented a run on the banks, it has been unsuccessful in restoring the availability of credit. Part of this is because many of the banks have significant potential future losses and are trying to remain solvent. The problem is the banks that are in a position to lend are not lending the TARP money they received. These healthier institutions parked the TARP funds and have been waiting for an opportunity to return them to the federal government to avoid unwanted interference in their private businesses. The Treasury needs a new plan to restore the availability of credit in the economy.
What the Treasury should do with the returned TARP funds is quit using it as a rescue fund and use it as an economic renewal fund. The Treasury should reignite the asset-backed securities market for auto’s and jumbo mortgages by taking the returned TARP funds and using them as a reserve to guarantee newly issued asset backed securities ala Fannie Mae to support new lending in these markets. The Treasury should establish down payment and affordability guidelines to ensure the people receiving the loans have a reasonable chance to repay the loans. And the Treasury should not exclude someone with a subprime credit score if they can make a suitable down payment and afford the monthly payments. The strategy of not monetizing the debt combined with keep credit markets very tight is a strategy to plummet us to the economic depths experienced in the 1930’s.
Badtux said,
Thinking about it a bit, Fannie Mae was created because of the collapse of mortgage lending during the Great Depression. Perhaps we need a BigThreeMae to provide auto lending during the New Depression, given that the private market has collapsed. On my own blog I mention the problem of credit as a major problem facing the “new” GM, especially since GMAC is effectively out of the picture due to the Cerebus takeover. A new entity providing subsidized auto loans for the American automakers could most certainly help get auto lending, at least, unstuck — not to mention spur sales of American autos, and thus *jobs* rippling through the economy as suppliers pick up their own hiring and buying, their upstream resource providers pick up their own hiring and buying, etc.
It’s certainly worth a try, and a much better place for those TARP funds than under a mattress anyhow, which is effectively where the banks are putting it (on deposit at the Fed)… all that money under a mattress accomplishes is making your mattress lumpy :}.
Badtux said,
Oh yeah, about the folks whining that printing money will cause inflation — money stuffed under mattresses (or stashed by banks into the Federal Reserve, same difference) has no, zero, effect upon prices or wages. And that’s what’s happening right now — everybody sees their income as going down in the future, i.e., the future value of their money will be higher in their estimation tomorrow than it is today, so they do the seemingly rational thing that the paradox of thrift predicts — they stash the money away instead of spending (or lending) it. And by the way, we *are* experiencing serious wage deflation right now. The 2.5 million people who’ve lost their jobs this year experienced 100% wage deflation. Those keeping their jobs aren’t seeing their wages go down much if at all, but that’s not the statistic of interest to economists. In short, we are in active deflation right now, regardless of what the CPI says.
But folks still whine about printing money causing inflation during a deflationary cycle. I swear, you’d think that some folks never read even Milton Friedman, much less Keynes, Krugman, Viner, etc. How anybody can justify making portentious statements about the best thing to do with the economy without even reading the fundamental scholarly underpinnings of the field eludes me, do these people hire a pizza delivery boy to do their plumbing? Do they hire a fry cook to do open heart surgery on themselves? Yet for some reason they think expertise is unnecessary for making policy declarations about economics. Baffling.