Comments on: Unprecedented moral suasion from regulators on small businesses lending

By: demandside

demandside — Mon, 08 Feb 2010 03:55:00 +0000

My recollection is that bank lending to the real economy did not start until after the rate hikes in the early 1990s. The HY investing is more similar to the speculative games now in vogue than to finding creditworthy borrowers.

The fact that the banks have dodgy assets is something that ought to be directly addressed. Not being direct and allowing this zombie process is not functional. Let the writedowns begin! The sooner they are cleared, the better.

Yes, the banks may not survive. But you are right on, “We are going to have to recognize the bad debts.” And by that, I don’t mean backstop them at the Fed or Treasury. Resolution authority is the way to go. Will it take another crisis to get people off their butts to get this done?

You are also right in “more malinvestment.” It is creating bubble conditions.

This is equivalent to not getting to the Banking Act of 1933, the Glass-Steagall protections, and the reconstruction of the banking system so it functions. All that is still ahead.

By: Edward Harrison

Edward Harrison — Sun, 07 Feb 2010 21:32:00 +0000

The problem with bank margins is that banks have a lot of dodgy assets on their books. They need the margins to build up a buffer for the writedowns those assets will engender. If you look at the S&L crisis, having the banks lend via investing in HY ended up being a disaster that only worsened the problem.

And if you remember, in the early 90s the high margin trick was exactly what was in vogue before Greenspan started to hike rates in 1994. He did so because he felt that enough time had transpired since recession had ended in early 1991 to do so. We have had a BIGGER recession and less time. So following that logic, rates aren’t going anywhere. We’ll see less unconventional measures, but higher rates – I’m not a believer.

Personally, I do think rates should be higher for different reasons. Zero rates distort investment decisions making higher risk longer-term payoff options that are uneconomic palatable. The result of course is more malinvestment. Low rates are not the solution. We are going to have recognize the bad debts.

By: demandside

demandside — Sun, 07 Feb 2010 21:20:00 +0000

Banks have no incentive to look for small businesses when they can borrow at 0 and go get 3 or 4 in the Treasury market. Why not squeeze that margin so they are motivated to lend to real customers? I do not see that zero has created any investment. It seems to help those who have loans tied to the prime rate, identified now, I guess, as 3 percent above the federal funds rate, and more importantly, it helps the banks via backdoor bailouts.

Why would that squeeze not get them back in the real economy looking for good credit risks? It seemed to work in the early 1990s.