Why won’t your bank lend money to other banks, or to many homeowners, car buyers, small businesses or big businesses right now? Because there isn’t much of a secondary loan market at the moment. Or a commercial bond market. It’s all one big constipation problem in our credit markets.
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“There’s so much liquidity in the system — unfortunately, the liquidity is not opening up lenders at all,” said Kim Rupert, managing director of global fixed income analysis at Action Economics. “It’s the epitome of credit turmoil. There’s too much fear in the market. Everybody is hoarding their cash, hoarding their reserves, not trading funds with each other.”
For big companies to operate and grow, they need to borrow money. Typically, they do this by selling short-term and long-term bonds in the credit markets. Right now, the short-term debt markets are at a standstill; the long-term debt markets are a bit more functional, but rates are very high.
Companies in search of cash do have an alternative — they can go directly to the bank. But banks have their own problems with capital right now, so a company trying to get a loan has about as much luck as a person trying to get a mortgage.
Those with clean credit histories will likely get loans, but at high rates. Those with spottier credit histories might not get loans.
“In a good case scenario, the economy is slow. In a bad case scenario, there are massive bankruptcies,” said Axel Merk, portfolio manager at Merk Funds.
“The problem is, the general public doesn’t understand this. Maybe we need to see a few payrolls fail at a few companies before they realize,” he said. “This has a very direct impact on Main Street.”
Banks are funny institutions, and I speak as a retired lawyer who used to work for a few banks. When the good times are rolling they push their people hard to make loans, and all the fee income that is generated. That’s because they can book the loans as assets and the fee income (which they might very well have loaned also to their borrower) as income that goes directly to their bottom line. It’s a double win.
And in addition, when the Wall Street firms were securitizing loans for them they could sell their portfolios into the secondary loan market while retaining the right to service the loans and make a fee for said services. This caused them to make some really stupid loans when there wasn’t any effective oversight by regulators. But when there’s any report of trouble, the old bank anus tightens up tighter than a cork in a bottle.
Guess what situation we’re in now? The central banks are pouring funds into the financial markets but to little if any effect. The banks are afraid to make loans in an uncertain economic climate because they can’t sell them to reduce their risk. With the housing market continuing to drop like a stone, and with no one able to assess the creditworthiness of their own portfolios, much less those of the other institutions that they normally deal with, they have done the old classic pucker the sphincter maneuver. And until they hear that the credit markets are functioning normally again, that’s the way it’s going to stay.
