Are Banks Struggling, or Scamming?

After all the money and other kinds of help that has been given to banks or extorted from the public, banks still aren't lending enough to make a difference in this troubled economy.

The Wall Street Journal reports that the biggest financial institutions "made or refinanced a total of $226.3 billion of loans in October. In February that figure had fallen to $174.2 billion." The only three outfits to make more "loans in February than October were BB&T Corp., a regional bank based in Winston-Salem, N.C.; Wall Street giant Morgan Stanley; and State Street Corp., a Boston-based company that provides financial services mainly to institutions and wealthy individuals."

You would think that since the banks can borrow money from the government at close to zero-percent interest and lend it at 4 percent to 5 percent, they would be shoving dough out the door into the hands of any vaguely solvent looking passerby, but they're not.

The banks contend that their problem is a dearth of borrowers. First-time homebuyers with their giant government gift of money may have reason to buy. And financially stable homeowners are refinancing. But in the effort to get the economy rolling again, this doesn't carry much of a punch.

Few others can pull the trigger. Many consumers are so far in debt that the idea is unthinkable. Others cannot see how they can put money to profitable use. Buy new machinery when the equipment you have is already idle? Investing in industrial bonds is not a bad idea-- unless the company issuing the bonds suddenly suspends payment on them and slides into bankruptcy.

For many people, this is the time to hunker down. If they go to the mall, it's to look. So banks may have a point.

On the other hand, banks may be reluctant to lend because the more loans they make, the more capital they need to back up the loans in case they go bad. Fear or avarice may lead them to hoard the money instead of lend it.

Another possibility is that the banks may have found new ways to steal money, which is more profitable than lending it. The banks' conduct has been so devious, so mendacious, so shifty and so dishonorable that you cannot rule out any kind of sharp practice. You just can't trust the bastards.

In recent days, some banks have enhanced their reputations by announcing quarterly profits achieved not by business enterprise but by bookkeeping legerdemain. They have been rewarded for this misdirection by seeing their stock walloped by investors.

Next comes Neil Barofsky, inspector general for the Troubled Asset Relief Program (TARP). He warns that the way the Treasury Department is running the program makes it open to massive swindles, and if there are swindles to be had, bank on the banks to get in on them.

None of this bodes well for the increased borrowing they say we need to get people and businesses spending again. A conservative economist at Harvard, Gregory Mankiw, who used to give President George W. Bush advice, is toying with the idea of negative interest rates. Under such a regimen, if you borrow $100, you need only pay back $97. Borrowers would be lining up for such a deal, but lenders--not so much. If the lender is going to lose 3 percent on every loan, the lender will have to be the government. Try selling that to a public growing more angry every day with bailouts, bank subsidies, TARP giveaways, economic stimuli and other gifts to the business people principally responsible for the sea of woe in which we find ourselves.

If the politics of negative interest rates lacks promise, Mankiw has a way around the problem. "If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation...while nominal interest rates could remain at zero, real interest rates--interest rates measured in purchasing power--could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend."

Zimbabwe went the inflation route, and you can see how that worked out: at 231 million percent, Zimbabwe has the world's highest inflation rate. Soaring prices have put basic necessities out of reach for millions. And now people are reduced to eating dirt and stripping the bark off the trees.

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