Yesterday’s House Financial Services Committee hearing gave evidence that bank lending is flowing again, but credit is still tight.
As is traditional in these affairs, a good deal of time was chewed up by congresspersons zealously jawboning to express vicarious anger on behalf of their constituents.
Executives from eight major banks showed up to testify on how they spent their share of the TARP money. The CEOs actually did a pretty good job of demonstrating that they are indeed injecting TARP money into the banking system: Citigroup CEO Vikram Pandit indicated that his company had generated $36.5 billion in “new lending initiatives and other new programs” and Goldman Sachs’ Lloyd Blankfein indicated that Goldman had “committed over $13 billion in new financing” with its slice of the TARP pie.
On the whole, the bankers came away without much of a thrashing. Pandit demonstrated Citibank’s commitment to accountability by announcing that his salary would be $1/year until things get back to normal. He and his chums demonstrated, on the whole, at least as much contrition as Tim Geithner did when offering his mea culpas for not paying his taxes on time. Although I haven’t seen the entire hearing, I’m willing to bet that no one pointed out that several of the banks represented took TARP money not because they needed it at the time, but because Hank Paulson twisted their arms.
Mostly, the committee wanted to know why – if the banks have indeed been lending and not hoarding their TARP funds – the credit markets are still sluggish. Actually, they should have been listening to Fed Chairman Ben Bernanke in his testimony to them on the previous day. Bernanke had already explained that the Fed has been busy trying to shore up and stimulate the non-bank portions of the credit markets. A good deal of the lending that is broken was in the asset-backed securities markets and other non-bank lending.
What has not been much discussed is that prior to the credit crunch, we were awash in credit, and that in many ways was the problem. A lot of credit was extended to borrowers who lacked the means to pay or who had collateral that was wildly overvalued. For example, yesterday I caught the end an NPR segment in which a young man explained that before the crunch he was able to buy a house and get a mortgage for almost ten times his annual salary.
Now the lending pendulum has swung in the opposite direction. We shouldn’t expect lending to return to prior levels for a long time, because at the peak we were awash in too much credit. Until bloated debt levels have declined and banks are able to figure out the true value of some of their assets, we should expect a certain degree of stagnation.
For the next year or so, the ability to avoid debt will be a key strength, and cash will be king. Banks are lending, but they’ve gotten a lot stricter about who can get money from them. The old saw still holds true: bankers are always happy to lend you an umbrella – until it starts raining. Those who are least in need of credit will find it easy to get.
image by: Mig_R