Thursday, April 23, 2009

When Will the Chicken Cross the Road

Ken Lewis, CEO of Bank of America recently made the following statements, “Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Even our internal economists are a little at odds as to the timing with some seeing recovery earlier (than year end). We believe unemployment levels wont peak until next year at somewhere in the high single digits.” Given these statements it’s no wonder banks are being accused of not lending. Maybe it is time that the banks tried leveling with us. Given today’s economic climate most loans appear to be bad business.

All of the major banks, JP Morgan (JPM), Wells Fargo Corp. (WFC) and Citigroup Inc. (C) are guilty of doing it, they are not loaning the TARP funds they have received. Instead, they are using the funds to make their banks balance sheets stronger. Critics believe that the banks should be loaning this money in order to stimulate the economy. These loans are supposed to lead to investment, increase business, jobs and overall stimulus of the economy, but the money must be lent for this to happen. The banking community insists they are lending while the consumer wholeheartedly disagrees.

This morning Donald Trump appeared on CNBC. As usual he was selling something. In this case, it was a book. He lamented that the banks are not lending. He was quick to point out that contrary to what the bank spokespeople and CEO’s were saying on CNBC and to reporters, they are not lending. He further protested that a bank loan, a home loan or a new credit card are next to impossible to obtain for almost all consumers. The position that he took was accurate. The unfortunate fact is banks are keeping the money because the real issue, according to banks, is that we are not worthy of the loan.

From home loans, to car loans and everything in between, we are defaulting. Student loan defaults are at an all time high. Small Business Loans (SBA) are at an all time high. Home foreclosures are at an all time high. As rational individuals, we must see the banks point of view. If you put money in your bank and returned to find it no longer there, would you deposit again? We doubt it. The banks feel the same way. Each time they lend, they lose, so why lend again? You know what, they have a point.

The issue here is that the banks make money from lending and the consumer needs the loan. Neither is getting what it needs right now. This has created a vicious cycle that the Fed did not intend. Why did the chicken cross the road? In this case, all the banks know, is there cant be a default if there is no loan. And the consumer knows, without the loan they are immobile. We feel, given the tarp funds, the banks need to make the first step.

So, I guess the real question is, “when will the chicken cross the road?”

Article Written by: Steven Gray