Wall Street Vs. Main Street

After listening to today's House committee questioning of the Big 8 CEO's, I grew more apprehensive about the current financial situation. The basis of the discussion was quite simple; the representatives want the banks to increase lending in order to make efficient use of tax-payer money, and the banks attempted to convince these representatives, and their constituents, that they were in fact lending. This was to be expected. My fears surfaced when I began to look at the big picture. Main street is coercing the banks to lend, but the banks are unable to make sensible loans given the current economic environment. From the banks' point of view its simple: If we don't believe that this borrower can service the loan, we won't make the loan. This is prudent business that should be commended. Unfortunately, it was the lack of this prudent business that got us into this mess. Because this crisis has now consumed the greater American economy, the banks are facing two massive headwinds. One, they are still unable to value the assets on their books and two, as unemployment rises so does the default risk on standard consumer loans. Until these two factors are under control, banks will continue to be cautious...and who can blame them? Below I have included a synopsis from the FRB Senior Loan Officer Opinion Survey for January. This serves as a great source for current lending conditions.

"In the January survey, the net fractions of respondents that reported having tightened their lending policies on all major loan categories over the previous three months stayed very elevated. Relative to the October survey, these net fractions generally edged down slightly or remained unchanged. Respondents indicated that demand for loans from both businesses and households continued to weaken, on balance, over the survey period."