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Why TARP is troubled
comments (0) January 27th, 2009 in Blogs
Richard Defendorf, contributor
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We’ve had plenty of time to digest the fact that many of the big banks that received billions under the Troubled Asset Relief Program didn’t respond as government officials hoped. Mainly, most of the big banks that got money haven’t increased lending.
And yet bank and government officials defend banks’ response to TARP as appropriate, although not ideal. The lead story in yesterday’s edition of The Wall Street Journal analyzed the issue at some length, noting that 10 of the 13 banks that collected TARP funds – some $148 billion in total – reported a decline in outstanding loan balances by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008.
Bankers told the Journal it will take time for them to funnel a large portion of their government capital into loans, which will have to be processed carefully to ensure they are relatively low risk. What’s more, demand for loans has dropped off as consumers and businesses trim spending. The story cites data from the Mortgage Bankers Association showing that applications in the week ended January 16 declined about 10% from the previous week, even though mortgage rates are down.
The reality is, too, that banks’ slowness and caution has already become part of the self-perpetuating cycle of belt tightening among consumers and businesses. And banks’ outstanding loan balances are less and less likely to tell us the whole story, since most banks are no longer selling loans off to investors or financial institutions, and it’s not clear when the loans still on the books were made.
No doubt there will be more strings attached when the next round of TARP funds is released, but with unemployment and foreclosures sustaining the downturn, it seems banks are unlikely to lead the charge to stability.
posted in: Blogs, business
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