Zombie Banks Deny the Oxygen of Credit to Consumers

Posted by Michael A. Kamperman on September 8, 2009

The Zombie Banks are suffocating the consumer.  The latest data for July shows that consumer credit fell $21.6 billion in July.  This is an all-time record low. Additionally, consumer credit for June was revised down with credit dropping $15.5 billion.  Consumer credit includes almost all forms of secured and unsecured consumer credit, except for loans secured by real estate.  The consumer is not being cautious with credit as many in the media report over and over.  The consumer is being denied credit by the Zombie banks.  The standards for consumers to receive a loan from a bank are getting tighter and tighter.  There is no meaningful shadow banking system left to step in and provide alternative credit options to consumers.  The consumer accounts for 70% of the nations GDP.  Anyone thinking the U.S. economy is going to have inflation and a V-shaped recovery without consumer spending kicking in needs to have their head examined.  Without access to credit, the consumer will continue to be forced to spend less and less.  The reason the unemployment rate keeps rising is the consumer cannot access affordable credit to provide the spending that creates jobs.

This week Washington will continue to debate healthcare when they should be debating fixing the broken credit markets and finding jobs for the unemployed.  The July credit numbers come after the Zombie banks either passed the vaunted Stress Test, or raised the amount of capital required by the Treasury.  So why are the banks not lending in this zero interest rate environment?  It is because the credit markets remain broken.  The smoke and mirrors Wizard of Oz Stress Test trick to not look behind the curtain is a failure for the real economy.  Unless real steps are taken by Washington to fix the broken credit markets the economy will remain mired in a deflationary depression.

The solution is to create a “bad bank” and clean up bank balance sheets once and for all.  Then, the federal government needs to back the securitization market so banks have a place to sell their loans and recycle the cash into another loan.  Finally, if Washington wants to see the economy move forward they need to open up credit to people with subprime credit scores.  The moral high ground aversion to loaning to people who have been down on their luck in the last two years is killing the economy and causing large scale unemployment.  Many people who said that people with subprime credit scores shouldn’t get loans last year have found themselves unemployed this year as business has dried up.  We all know someone who is unemployed.  Is our puritanical moral superiority worth seeing those people we know lose all of their savings, their homes, and their self-esteem?  I think not.   I think it is high time Washington got serious about saying the economic crisis is the biggest crisis facing the country.  Then, I think both republicans and democrats need to sit down in good faith and negotiate solutions for the good of the country and not for the good of their own personal 2010 election prospects.