TARP Babies: Are They Lending As Much As They Should?

Thanks to the Wall Street Journal we finally have some data concerning lending levels by banks that received TARP funds.

Lending at many of the nation’s largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.

Ten of the 13 big beneficiaries of the Treasury Department’s Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.

Now you can cut those numbers a lot of different ways and reach just about any conclusion that your pre-existing biases lead you to but for my money, a 1.4% decline is margin of error stuff. In fact, in view of the current economic environment I’m frankly surprised it wasn’t a bigger drop.

The biggest mistake that the politicians made with TARP was to try and sell it to the public as a means with which to get the banks to make more loans. It was never that. It was a program to put a patch on a tire that was perilously close to blowing apart. It would have been much better to have told the truth. We had a financial system in which no party trusted any other party and the first order of business was to stave off imminent collapse. To do that capital had to be injected fast and the participants assured that the government wasn’t going to let anyone fail. That was done and it was done successfully.

A number of bloggers and pundits are noting correctly this morning, as they have for some time, that pushing banks to lend aggressively into this market is simply a plea for more bad loans. A way to compound our problems. As we were not too subtly informed over the weekend, the problem is deeper than advertised and more money than we think is going to be needed to fix the problem. Asking banks to inflate their balance sheets at this juncture is simply bad business.

Longer term, the real problem is how to replace the shadow banking system that disappeared when the securitization market was vaporized. The level of credit that had been made available was facilitated by the ability of the banks to make loans and then move it off their balance sheets. That avenue is no longer open and the level of capital and leverage proposed for the banking system will not allow them to originate that much debt. Either we are going to have to move to permanently lower levels of outstanding credit or we will have to reconsider how we plan to accommodate more. You can’t have it both ways.

Rather than continuing to whine about bank lending, perhaps we should step back and congratulate ourselves for having gotten through the worst of a very bad situation. Our leaders should be pointing out the difficulties of the current situation, the rebuilding that is going to have to take place and frankly admitting to the electorate that we may have to do with less for awhile. The truth is that we can’t go back to what we had right away and maybe don’t want to go all the way back there ever.

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