to increase their lending to consumers and businesses—they actually cut it slightly! Though they’re now wallowing in federal funds, the Treasury Department said that the banks that got TARP aid cut their mortgage and business loans by 1 percent and also reduced their credit card lending. Sixty percent of the banks said they had tightened their lending standards on credit cards and other consumer loans during the quarter. 108
Typical of the banks’ reaction to the taxpayer bailout largesse was that of John C. Hope III, the chairman of the board of Whitney National Bank in New Orleans. In a comment that recalls Marie Antoinette’s suggestion to the starving people of France (“Let them eat cake!”), Hope told a gathering of Wall Street analysts what he was going to do with his $300 million bailout. The New York Times reported on the scene:
“Make more loans?” he asked rhetorically—as if the very notion was ridiculous. Stuffily he intoned, “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”
This from a man whose bank’s “business model” was so sound that it needed taxpayers to cough up $300 million to keep it in business!
WHERE IS THE MONEY?
So where did all the money go? What happened to the massive bailout cash if it hasn’t been lent to consumers or businesses?
It’s sitting in a vault at the Federal Reserve Board! Most banks used the bailout money to correct their balance sheets and reassure investors that they weren’t about to tank but never actually took most of the money. Their ruse didn’t work, of course. For the most part their stock prices tanked anyway, and the bankers were content to let the cash sit at the Fed. No need to alter their business models!
And the Federal Reserve Board, ever accommodating, decided to start paying interest on the TARP reserves the banks left in its vault! (As if to create an incentive not to help the economy by lending it out!)
In March 2009, according to reports from the Fed, a total of $800 billion in reserves owned by banks was still sitting in its vaults, happily earning interest and doing nothing to help our economy. How big is this pile of unlent money? So big that it equals all the currency in circulation in the United States at the moment. For every dollar in wallets, purses, and cash registers in the United States, there is another dollar lounging in the Fed’s vault!
And what was the Fed’s solution? To put more money into the vault. As we write this, the Fed has decided to pump another trillion dollars into the system—hoping it won’t just sit in the vault next to the $800 billion already there.
WHY WON’T BANKS LEND?
As Christopher Boyd wrote in the Orlando Business Journal: “To borrow a line from Bill Clinton’s 1992 presidential campaign, ‘It’s the economy, stupid.’” 110
Now that the banks have gulped down the $350 billion in the initial bailout package (as of March 11, 2009), why aren’t they lending?
Craig Polejes, president of the Florida Bank of Commerce in Orlando,says, “It’s unreasonable to expect banks to loan money to companies that aren’t making money.” 111 With consumers losing their homes and jobs while businesses see the red ink of the recession adding up on their balance sheets, the banks won’t risk their money.
And the lesson of the stunning failures that impelled the bailout in the first place isn’t lost on a generation of managers of financial institutions: Don’t stick your neck out. Rein in risky investments. Play it safe and conservative.
Which is, of course, precisely the opposite of what the Fed, the Treasury, and Congress had in mind when they approved the bailout. But this Catch-22—banks won’t lend while the economy is bad, and the economy won’t improve until banks lend—shows no signs of letting up in the near future.
Until the inevitable happens, that is, and the
Typical of the banks’ reaction to the taxpayer bailout largesse was that of John C. Hope III, the chairman of the board of Whitney National Bank in New Orleans. In a comment that recalls Marie Antoinette’s suggestion to the starving people of France (“Let them eat cake!”), Hope told a gathering of Wall Street analysts what he was going to do with his $300 million bailout. The New York Times reported on the scene:
“Make more loans?” he asked rhetorically—as if the very notion was ridiculous. Stuffily he intoned, “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”
This from a man whose bank’s “business model” was so sound that it needed taxpayers to cough up $300 million to keep it in business!
WHERE IS THE MONEY?
So where did all the money go? What happened to the massive bailout cash if it hasn’t been lent to consumers or businesses?
It’s sitting in a vault at the Federal Reserve Board! Most banks used the bailout money to correct their balance sheets and reassure investors that they weren’t about to tank but never actually took most of the money. Their ruse didn’t work, of course. For the most part their stock prices tanked anyway, and the bankers were content to let the cash sit at the Fed. No need to alter their business models!
And the Federal Reserve Board, ever accommodating, decided to start paying interest on the TARP reserves the banks left in its vault! (As if to create an incentive not to help the economy by lending it out!)
In March 2009, according to reports from the Fed, a total of $800 billion in reserves owned by banks was still sitting in its vaults, happily earning interest and doing nothing to help our economy. How big is this pile of unlent money? So big that it equals all the currency in circulation in the United States at the moment. For every dollar in wallets, purses, and cash registers in the United States, there is another dollar lounging in the Fed’s vault!
And what was the Fed’s solution? To put more money into the vault. As we write this, the Fed has decided to pump another trillion dollars into the system—hoping it won’t just sit in the vault next to the $800 billion already there.
WHY WON’T BANKS LEND?
As Christopher Boyd wrote in the Orlando Business Journal: “To borrow a line from Bill Clinton’s 1992 presidential campaign, ‘It’s the economy, stupid.’” 110
Now that the banks have gulped down the $350 billion in the initial bailout package (as of March 11, 2009), why aren’t they lending?
Craig Polejes, president of the Florida Bank of Commerce in Orlando,says, “It’s unreasonable to expect banks to loan money to companies that aren’t making money.” 111 With consumers losing their homes and jobs while businesses see the red ink of the recession adding up on their balance sheets, the banks won’t risk their money.
And the lesson of the stunning failures that impelled the bailout in the first place isn’t lost on a generation of managers of financial institutions: Don’t stick your neck out. Rein in risky investments. Play it safe and conservative.
Which is, of course, precisely the opposite of what the Fed, the Treasury, and Congress had in mind when they approved the bailout. But this Catch-22—banks won’t lend while the economy is bad, and the economy won’t improve until banks lend—shows no signs of letting up in the near future.
Until the inevitable happens, that is, and the
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