Commentary

Credit is Tight, but its NOT the Bankers’ Fault

I came across a fantastic article earlier this week in the Washington Times – who would have guessed? Like everyone else, I’m quite distressed by the current global financial disaster. I’m also confused as to how it all started, and what solutions the government and private sector should seek in order to halt the economy’s meltdown. This is why I was so pleased to read “Wounded banks: Only game left,” by Patrice Hill. A big part of the problem seems to be (according to politicians and their many parrots in the media) the fact that banks, despite hundreds of billions in federal bailout funds, are not lending like they used to.

The massive creation of credit in the United Sates over the past few years allowed consumers to spend without saving and businesses to finance investment at very low interest rates. Many people believe, even today, that it is the conventional banking system – with branches housing loan officers and tellers – determining the availability of loans. How wrong they are.

Ms. Hill points to the fact that the enormous markets for securitized loans have been paralyzed over the past year and a half – and that this is what really lies behind the contraction in credit. Corporations issued commercial paper to fund their operations and sold bonds to finance investment. Consumers relied on auto loans, student loans and credit card debt to function as patriotic Americans – all of their loans were bundled up by neighborhood bankers and eventually sold as securities to investors around the world.

According to the Federal Reserve, banks provided only $8 trillion of approximately $25 trillion in loans held in America last year. Bond markets loaned $7 trillion, however, the biggest share of borrowed funds – $10 trillion – came from the securitized loan markets, which, as Hill notes, were providing but a thin slice of overall credit just twenty years ago.

Consumers of every stripe are feeling the pinch as the markets for securitized loans have evaporated, making home and car loans tougher to come by and credit cards more expensive to maintain. Businesses are seeing their credit sources dry up as well. The bond market, over the past several months, has been either too expensive, or off limits to most companies. And the commercial paper market has all but shut down, even though the Fed stepped in to insure investors against default.

The numbers regarding loan creation provided by the Federal Reserve mean that almost 70 percent of the credit sources for the American economy are no longer functioning as they once were. The American banking system relied heavily on the securities market to create credit over the past several years. Banks would make loans, bundle them up and then sell them to investment banks. From there, these new securities were stamped with approval by bond ratings agencies and peddled to investors from all over the globe. The sale of bundled loans returned money to the banks, allowing them to make even more loans.

Now this process has come to a grinding halt. Foreign buyers, stung by collapsing mortgage-backed securities, are staying away from almost all securitized loans, and are demanding a higher premium for lending to companies in the U.S. bond market.

This is why credit is so hard to come by in the United States these days. Sure, the bankers made enormous blunders over the past few years. They turned a blind eye to risk assessment and left the taxpayer holding the bag filled with their IOUs. But, as Ms Hill points out, they were but a small part of the credit-creating juggernaut that fed the American housing bubble and consumption boom. She finishes the piece by quoting an analyst with CreditSights, who believes that the securitized loan market will have to come back to life in order to revive credit creation in the United States.

I agree that the banking system will not be able to turn on the spigots again without the help of the securitized loan market. But I do not hold out much hope for that scenario becoming a reality. The nations that funneled their excess savings into America’s complex debt markets – helping create cavernous homes and expansive shopping malls – are now reeling from the global recession that started in these very markets 18 months ago. They are not going to have the mountains of cash to lend us anymore, and Americans will just have to learn how to save their money and make do with fewer of life’s shiny things.

Please be aware that I have a much fluffier side. You simply must check out my awesome cartoons in the Splendid Marbles Cartoon Gallery.

I also host a Cartoon Caption Contest on Mondays, and I have brand new original cartoons for you every Wednesday.

While you’re here, sign up for my feed so you can get some of the best in original political cartoons and commentary

© 2009 Splendid Marbles.