Zombie Banks Thwarting Monetary Policy
Posted by Michael A. Kamperman on October 19, 2010
The Fed will begin printing money large amounts of money come November 3. At first they will print hundreds of billions, eventually trillions. The reason they will need to print much more than they realize is a combination of the size of the deleveraging taking place in the economy, the political paralysis in Washington, and the Zombie Banks failure to lend. While the coming political paralysis is being well chronicaled, the failure of the Zombie Banks to lend to small buisinesses continues to slide under the radar. That may be about to end. The Zombie Banks have insisted over and over again that they have plenty of money to lend to small businesses and the reason small business loan totals have fallen is that demand for those loans simply isn’t there. This lie has now been exposed by a recent survey conducted by the New York Federal Reserve. In the survey 3 out of 4 small businesses that requested credit in 2010 were turned down for some, or in most cases all, of the money they requested. While there is no doubt some of these potential borrowers are not credit worthy, it is highly unlikely the banks are justified in turning away 3 out of 4 small business borrowers. Bottom line, the unjustifiably tight credit conditions are costing the U.S. economic growth and jobs. Now we learn the banks don’t even know how to properly document and foreclose on a mortgage igniting yet another crisis. The Fed need the banks to lend, otherwise they are simply pushing on a string.
The reason for the tight credit conditions is the banks are sitting on hundreds of billions of unrecognized loan losses. The Whitehouse may have saved the bank bond holders and many of the bank stock holders, but they have done this at the expense of consumers, small businesses, and job seekers. They never established a ‘bad bank’ to handle the problem loans because they perceived it was too risky politically. But their attempts to sweep real problems under the rug have exasperated the depression and by playing it safe they are about to pay an extreme price at the polls. Unfortunately, it doesn’t seem as those the Whitehouse is getting the real messagge….”it’s the economy-stupid.”
There is a simple solution to the problem. Have Fannie and Freddie refinance every above-water mortgage in America for 30 years at 4% and refinance every below-water mortgage in America for 2%. Do not appraise properties. Do not run credit checks. If someone is behind on the mortgage, then simply roll it into the principal of the new mortgage. If the mortgage had a valid title policy, then accept it as proof of title and do not require a new one. While this sound radical to many consider the benefits. First, it will put tens of billions of dollars of savings back in the pockets of consumers, who can then spend, save, or pay down other debts and repair their balance sheets. Second, by lowering the payments on all mortgages,especially under-water ones, it increases the chance the existing borrowers will be able to pay their mortgages. Third, it will quickly remove a vast number of potential foreclosures from the market stabilizing home prices. Fourth, it will instantly pay-off many problem loans at the Zombie Banks freeing them up to start lending again to consumers and small businesses. Finally, offering a concrete long term solution to the busted real estate market will restore confidence in the economy. There are of course dozens of objections based on moral hazard…but we can’t afford to stand by and watch a house burn to the ground because the owner didn’t pay his $75 fire dues. There is no reason to worry about the tax-payer, they are already on the hook for bailing out over 90% of the current mortgage mess between Fannie, Freddie, the banks, and the pensions the federal government guarantees. Why not try something where everyone is a winner and there are no losers?
