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Of Course Banks Aren't Lending...And There's Nothing Wrong With That

Posted Apr 20, 2009 12:56pm EDT by Henry Blodget in Investing, Recession, Banking
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The government's goal since the beginning of this crisis has been to get banks lending again.  According to the Wall Street Journal, however, lending by the country's biggest banks has fallen significantly since last fall, when the bailout efforts began in earnest.  So have the policies failed?

Not entirely, says Josh Rosner, managing director at research-boutique Graham Fisher.  And the decline in bank lending is not just the result of strapped banks hoarding taxpayer cash.

Banks are lending less, Rosner says, because there is less demand for loans from consumers and businesses.  Creditworthy borrowers, the folks the banks would like to lend to, are postponing purchases (and borrowing) in the hope that the economy will improve or prices will drop.  Would-be borrowers who need cash, meanwhile, are no longer considered credit-worthy, now that the banks have tightened credit standards.

It's easy to blame the banks for this, but it's important to remember what led to this crisis in the first place: Reckless banks making loans to borrowers who couldn't pay them back.  So unless the goal is just to pile up bad debts again, it makes sense for the banks to get tougher.

One problem with government policy thus far has been the refusal to acknowledge that some banks can't (and shouldn't) be saved.  For the country to get through this crisis, that will have to change.

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