Saturday, January 24, 2009

Are the banks lending? Jim Biano says, "Yes, but we need to address securitization."

Floyd Norris writing for The New York Times asks, "Should we force banks to lend -- and why save the banks if they will not lend?

That has become a significant political issue on both sides of the Atlantic as governments confront the reality that preventing the financial system from collapsing is not the same as repairing it. In Britain, that led the government of Prime Minister Gordon Brown to announce a new round of bailouts, with a twist. “In return to access to any government support, there will have to be an increase in lending, and that will be legally binding,” Mr. Brown said.

In the United States, aides to President-elect Barack Obama sounded a similar theme. “The focus isn’t going to be on the needs of banks,” Mr. Obama’s chief economic adviser, Lawrence H. Summers, said. “It’s going to be on the needs of the economy for credit.” There is little doubt that many in the public are fed up with wealthy bankers who get large salaries and bonuses from banks that would have failed had the government not stepped in.

Jim Bianco of Bianco Research addressed the issue this week. He said, "The banks are lending. The problem is we have unrealistic expectations." As the chart above shows, securitization has accounted for a larger part of credit creation than bank loans. He says, "Bank lending was not the biggest creator of credit over the past few years. The marketplace is asking the banking system to instantaneously double is its credit creation capacity. It cannot." He asserts that we should address the problems with securitization and not expect banks to more than double their level of loan creation - especially during the economic downturn.