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Source of crisis goes beyond banks
A Wells Fargo Home Mortgage branch in Brooklyn, N.Y.
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KAI RYSSDAL: So about that lending. . . . Remember, this financial crisis started as a credit crunch. And we've been hearing for it seems like forever that banks just won't lend.
Statistics from the Fed appear to back that up, showing most commercial banks are indeed tightening their lending standards. All the while two different presidential administrations have been doing their darndest to convince banks to start lending again and help repair the economy.
But there's some equally persuasive evidence out there that throughout last year, even as the credit crisis took hold, banks were still extending credit -- and plenty of it, too.
From New York, Ashley Milne-Tyte reports.
ASHLEY MILNE-TYTE: The Fed says during the final three months of last year commercial banks increased their lending by 2.36 percent. Still, most credit in the U.S. actually doesn't come directly from banks.
Octavio Morenzi heads financial services consulting firm Celent. He says other sources of credit have dried up.
Octavio Morenzi: All the securitized markets have certainly suffered. Mortgage-backed securities we see much less of. We see much less of certain sort of exotic kinds of credit derivatives like CDOs or CLOs and things like that.
All those securities let consumers extend their credit. Now the market for them has all but collapsed.
But Simon Johnson of MIT's Sloan School of Management says the statistics on bank lending don't tell the whole story. He says it's definitely tougher to get a loan these days.
SIMON JOHNSON: If you think of there being three types of borrowers: Really creditworthy, medium creditworthy, and somewhat dubious. The really creditworthy I would say don't want to borrow; the medium creditworthy are getting squeezed by the banks; and the very dubious people are not able to borrow at all.
He says big companies and debt-laden consumers are cutting costs as they steel themselves for the recession. And as the desire to borrow shrinks, banks are likely to further rein in their lending. So . . .
JOHNSON: When I hear people, for example in Congress, saying, "We must force the banks to lend," that makes me very worried. Because who exactly are they going to lend to?
Johnson says small businesses are the only viable candidates.
In New York, I'm Ashley Milne-Tyte for Marketplace.
Well, how do these lending institutions earn their profits? By lending, and making their profit not from the investment done with the money, but from the interest paid to them, and any fees tacked on the top, side, back and front of that loan.
So, the more they loan, the more they earn...until they have made bad loans. Then they try to make more loans, to cover for the bad ones--sort of like a Ponzi scheme on shareholders, covering up loans that pay no more, with new bad loans that will stop paying soon, and thus need to be covered by new bad loans that pay at the beginning, then stop later.
"Remember, this financial crisis started as a credit crunch."
No! The credit crunch did not create itself; there is a cause. The ultimate cause is threefold: (1)decades of federal budget deficits, making any attempt at fiscal policy impotent, (2)many years of trade deficits, exporting wealth and standard of living, and (3) loss of US jobs and/or lower wages (surprise!). What makes any of us think we can solve this problem by throwing money at it? Has that worked in the past?
