The Wall Street Journal ran an article written by Ken Lewis, CEO of Bank of America, discussing the current beliefs about banks and how nationalization would undermine confidence in the financial system.
Just as we have shown in our on going series, "All this has happened before and it will happen again," Lewis discusses the story of our economic crisis mirrors every great market bubble in history. Clearly, banks were key participants, but they were not alone. Mortgage lenders, borrowers, regulators, policy makers, appraisers, rating agencies, investors and investment bankers all played a role in pushing economic excesses forward. The institutions that gave in completely to the frenzy are no longer with us. Those that balanced the need to compete with the need to lend prudently survive today and are helping to stabilize the system.
Lewis has provided some clarity on a few key claims that have been repeated so often they are now taken to be fact. They are not.
-The banks aren't lending. This claim is simply not true. Yes, banks have tightened lending standards after a period in which standards were too lax. But according to Federal Reserve data, bank credit has actually increased over the course of this recession, and business lending is trending up modestly so far in 2009. Also, mortgage finance volume is booming as a result of low interest rates. What's gone from the system is the easy credit that got us into the mess, unregulated non bank lenders have disappeared, and the market for many asset backed securities has all but dried up. Most banks are making as many loans as we can responsibly can, given the recessionary environment.
-The banks are insolvent. In the past 18 months, we have seen fewer than 50 bank failures, That compares to about 2,000 failures or closings of commercial banks or savings institutions between 1986 and 1991. Thee may be more to come, but the vast majority of banks will weather this economic storm.
-The Troubled asset Relief Program (TARP) hasn't worked. Not true. Last October, when the Tarp was enacted, systematic risk threatened our entire financial system and economy. The point of the program was to stabilize surviving banks, prevent a total meltdown, and enable banks to lend more. The TARP and other government programs have worked, and banks are making more loans as a result.
-Taxpayers have given the banks billions and won't get their money back.TARP funds are not charity. Banks that received TARP funds will make about $13 billion in dividend payments to the U.S. Treasury this year. TARP funds are loans yielding anywhere from 5% to 8% interest. This is a win-win. Banks are getting the capital they need, and taxpayers are getting a strong return on their investment.
-The banks that caused this mess must be held accountable. In fact, while all banks participated in the bubble economy to some degree, the companies that did the most to cause this mess are gone. The managers and shareholders of those institutions have been held accountable by the toughest, most unforgiving master of all: the free market.
-The only way to fix the banks is to nationalize them. This is a misguided premise. The announcement of nationalization would undermine confidence in the financial system and send shudders through the investment community. Politicizing lending decisions and the credit allocation process would be destructive for the economy. Nationalization also would give the false impression that all banks are insolvent. We agree with Federal Reserve Chairman Ben Bernake's statement that nationalization of banks is not necessary to stabilize the banking system.
Getting our facts straight as we debate the important issues will help us rebuild a healthy financial services sector that can better support economic growth.
I agree with Ken Lewis as he continues to discuss in the article that one of the greatest challenges right now is the need to extend credit with the need of households to pay down excessive debt. Our economy had become too dependant on debt driven consumption to create growth. This may be the beginning of a serious and long over due cleansing for us all.
Just as we have shown in our on going series, "All this has happened before and it will happen again," Lewis discusses the story of our economic crisis mirrors every great market bubble in history. Clearly, banks were key participants, but they were not alone. Mortgage lenders, borrowers, regulators, policy makers, appraisers, rating agencies, investors and investment bankers all played a role in pushing economic excesses forward. The institutions that gave in completely to the frenzy are no longer with us. Those that balanced the need to compete with the need to lend prudently survive today and are helping to stabilize the system.
Lewis has provided some clarity on a few key claims that have been repeated so often they are now taken to be fact. They are not.
-The banks aren't lending. This claim is simply not true. Yes, banks have tightened lending standards after a period in which standards were too lax. But according to Federal Reserve data, bank credit has actually increased over the course of this recession, and business lending is trending up modestly so far in 2009. Also, mortgage finance volume is booming as a result of low interest rates. What's gone from the system is the easy credit that got us into the mess, unregulated non bank lenders have disappeared, and the market for many asset backed securities has all but dried up. Most banks are making as many loans as we can responsibly can, given the recessionary environment.
-The banks are insolvent. In the past 18 months, we have seen fewer than 50 bank failures, That compares to about 2,000 failures or closings of commercial banks or savings institutions between 1986 and 1991. Thee may be more to come, but the vast majority of banks will weather this economic storm.
-The Troubled asset Relief Program (TARP) hasn't worked. Not true. Last October, when the Tarp was enacted, systematic risk threatened our entire financial system and economy. The point of the program was to stabilize surviving banks, prevent a total meltdown, and enable banks to lend more. The TARP and other government programs have worked, and banks are making more loans as a result.
-Taxpayers have given the banks billions and won't get their money back.TARP funds are not charity. Banks that received TARP funds will make about $13 billion in dividend payments to the U.S. Treasury this year. TARP funds are loans yielding anywhere from 5% to 8% interest. This is a win-win. Banks are getting the capital they need, and taxpayers are getting a strong return on their investment.
-The banks that caused this mess must be held accountable. In fact, while all banks participated in the bubble economy to some degree, the companies that did the most to cause this mess are gone. The managers and shareholders of those institutions have been held accountable by the toughest, most unforgiving master of all: the free market.
-The only way to fix the banks is to nationalize them. This is a misguided premise. The announcement of nationalization would undermine confidence in the financial system and send shudders through the investment community. Politicizing lending decisions and the credit allocation process would be destructive for the economy. Nationalization also would give the false impression that all banks are insolvent. We agree with Federal Reserve Chairman Ben Bernake's statement that nationalization of banks is not necessary to stabilize the banking system.
Getting our facts straight as we debate the important issues will help us rebuild a healthy financial services sector that can better support economic growth.
I agree with Ken Lewis as he continues to discuss in the article that one of the greatest challenges right now is the need to extend credit with the need of households to pay down excessive debt. Our economy had become too dependant on debt driven consumption to create growth. This may be the beginning of a serious and long over due cleansing for us all.
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