Government Bailout: Not Giving Credit, Where Credit is Due

The reason the banks aren’t starting to lend yet is because they are now risk averse, regardless of how much money is being pumped into the system.

The U.S. taxpayer is propping up bank balance sheets through the Federal Reserve and we’ll be taking bad assets out soon with the bailout money.

Yet the credit isn’t flowing…

While you were sold in the weeks leading up to the approval that credit for Main Street was what this is all about, the fact is that it just props up the system and the players and does not increase credit availability.

Credit is extended through the use of underwriting criteria. The basics are intent and ability and in the case of asset based lending (mortgages, commercial property etc.) aspects of the asset itself. Does the borrower show the intent to pay (credit history), the ability to pay (income, cash-flow) and if an asset is involved; does the asset represent the right type of security, at an appropriate value, on which to make the loan.

We are now in a situation where all three of these evaluations are suspect but for the highest tier of credit quality and borrowers with significant assets. Declining asset values, business contraction, restrictive credit and higher unemployment all serve to increase the risk in making loans to the lower tiers even though they may be good credit risks.  

Until the banks are forced to lend, through mandated underwriting guidelines or regulatory force and assessment, the money will not make its way through to borrowers.

How is that for a conundrum?

Since the government has intervened and the American tax payer is being forced to hand over a trillion dollars (in this first installment),  the only way to get it back to the purported people who need it,” Main Street”, is for government to force the banks to do it. 

This is a vicious circle.

The Federal Reserves Balance Sheet

Before the bailouts “TARP” program has even been implemented, the Federal Reserve Bank has been pumping money into the system to very little effect for borrowers. The Fed has almost doubled the size of its balance sheet since January of this year:

 

The Fed does this by selling U.S. Treasury Bills (taxpayer debt). The newly borrowed money is then put into the banking system. The idea here is that the banks, now gorged with new capital, will circulate this money back into the economy through lending and other banking activities.

It hasn’t worked yet. It’s not going to work while the banks are still trying to boost their capital levels from massive overleveraging and also deal with unquantifiable levels of default in every area of lending.  

Credit will not flow by just pushing the money into the banks and hoping the system goes back to business as usual. Our government made the case that the tax payer has no choice in the matter and that unless we spend this money, “Main Street” won’t get credit. “Main Street” isn’t going to get that credit unless they force the system to do it.

Now that we’ve socialized our financial system in the name of “Main Street”, these same leaders should finish the job and force the system to get the money out to “Main Street”.

So there you have it. If you want credit to return to previous levels, the government is going to have to make them do it, with tax payer money, which will result in government controlling each of the individual banks risks and profitability. These are the same folks who did such a fine job before we had to nationalize everything.

Or we could stop now and understand that if they don’t force the banks to lend, credit will have to reach a lower, more rational level and it will be quite painful for some time to come. It's going to happen anyway.

Who was it our leaders told us we were helping again?

Comments

[Shea]

"Our Leaders" "Our Representatives" "Our Elected Officials"

It's obvious the people we elected aren't representing us. This "Sell Out" can be compared to a company crashing because of poor decisions made by the CEO...then having that same CEO come up with the plan to save the company!

The "Sell Out" is socialism at it's best. Let the banks fail...take the hatchet to spending by the government...give my money back!