Banks Still Dragging Economy Down

Posted by Michael A. Kamperman on November 1, 2009

The FDIC remains as busy as ever with its weekly Friday ritual of closing down banks deemed not to big to fail and therefore not allowed to sweep the losses under the rug.  But the losses are real and an effective way to deal with them at the large Zombie banks has not been put forward by the Obama Administration.  Since the beginning of the year consumer credit at the nation’s commercial banks has fallen by $45 billion through the end of August.  The Zombie banks bailed out by the taxpayers have not only cut credit to consumers, they have jacked up the rates they charge as well.  Congress passed a new law that was intended to protect consumers from abusive practices from the credit card companies.  Once the law goes into effect near the end of the year it will be very difficult for the banks to arbitrarily change the terms on consumer’s credit cards.  So the banks jumped out in front of a law no implemented immediately and dramatically raised credit card interest rates anywhere from 3% to 15%.  This will increase the minimum monthly payments on millions and millions of credit cards at a time when the banks are borrowing money at near zero interest rates.  The Obama administration which effectively controls the banks still holding TARP funds is complicity silent at this outrage.  The banks have also cut the loans to businesses by approximately $170 billion since the beginning of the year.  With the collapse of the shadow banking industry there are no real good sources of credit outside of the banks these days.  The deflationary depression will continue unless the banks loosen credit terms and lower fees.

 

Yet with broken banks breaking the backs of businesses and consumers our in over his head Treasury Secretary Tim Geithner declared on Meet the Press this morning that a bright spot in the recovery is the banking system, which he said is “dramatically more stable” because of the government bailout.  Yes the panic runs on the banks by depositors have ended.  But the continuing shrinkage of credit to small businesses and consumers is a clear sign banking is not a bright spot in the recovery.  When asked about another round of stimulus Treasury Secretary Geithner echoed the Obama Administration’s thinking that it is too soon to discuss more stimulus since most economists are predicting job growth will return as soon as the first quarter of 2010.  The weekly jobless claims are still running over half a million a week despite the current stimulus program and despite the Dow Jones reaching 10,000.   Yet the Treasury Secretary is willing to base policy of forecasts by the same people who didn’t see this problem coming in the first place.  The econometric models will not predict the continuing downturn because they are all based on the post World War II inflationary economy that no longer exists.

 

The Treasury Secretary needs to understand the big banks will not lend as long as they continue to extend and pretend.  He needs to put forward a credible plan for a “bad bank” to absorb the toxic assets held by these institutions so they will begin to lend again.  He also needs to put forward a credible plan to place government backing on the asset-backed securities market so banks can make a loan, sell it, and then make another loan with the same amount of capital.  President Obama is making the same mistakes President Hoover made at the beginning of the last depression by listening to liquidationist thinking that places an emphasis on maintaining monetary integrity and limiting federal budget deficits.  President Hoover lamented that error in his memoirs.  After President Obama is similarly thrown out of office in 2012 he too will lament the same errors in his memoirs.  While there is time for President Obama to fire his economic team and start over, he doesn’t seem to have the recognition of the size and scope of the problems we face or the political will to fix them.