Binyamin Appelbaum at the Washington Post should get an award for writing a story so much at odds with the conventional wisdom.
Banks throughout the United States carried on with the business of
making loans yesterday even as federal officials warned again that
their industry is on the verge of collapse, suggesting that the
overheated language on Capitol Hill may not reflect the reality on many Main Streets.…. many smaller banks said they were actually benefiting from the problems on Wall Street. Deposits are flowing in as customers flee riskier investments, and well-qualified borrowers are lining up for loans.
"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank
in Cherry Hill, N.J. "We’re doing fine. There are 9,000 financial
institutions out there, and most of them are small and most of them are
doing fine."Dunkelberg, a professor of economics at Temple University and chief economist for the National Federation of Independent Business,
added that a recent survey of that group’s members found that only 2
percent said getting a bank loan was the great challenge facing their
businesses.Even some of the nation’s largest banks, which have pushed hard for a
federal bailout, deny that the current situation is forcing them to
reduce lending. "The strength of our core businesses, capital and
liquidity are enabling us to continue to support our customers," Bank of America, the nation’s largest bank, said in a statement. It added, however, that the bailout plan would allow more lending.The most recent Federal Reserve
data show that the volume of outstanding bank loans declined 0.5
percent from the last week of August to the second week of September,
though it was up more than 6 percent from the corresponding time last
year.
The article goes on to discuss some of the real problems in the industry and do bear in mind that the majority of deposits are in big banks. Nevertheless, I found the perspective valuable. As I have argued, we should be paying more attention to the institutions that are doing well and can serve as substitute bridges to keep credit flowing to firms with valuable projects. I have also advocated increasing savings with a temporary savings stimulus package – this could involve expanding and making contributions to Roth IRAs tax deductible or something like promising no taxes on CD investments of 1 year maturity or longer that are made in the next year .
Alex, please keep on battling collective amnesia and reminding people that this is a crisis of too many riches. What I do not understand is that everyone seems to have forgotten that worldwide monetary base is at its largest ever and that what got us into this mess is a surplus of liquidity (I seem to remember some bearded guy even talking of a “worldwide savings glut” back in early 2005) which gave the financial industry the idea that cheap short term money was here to stay and that they could indulge in whatever amount of carry they wanted.
Another supporting data point is the veritable gold rush into the cash advance/unsecured credit line business, that was highlighted in a May 19 Business Week story. Firms such as AdvanceMe, Creative Merchant Funding, First Funding, Merchant Funding Network, Second Source, Strategic Source Funding, and a number of others are competing to provide working capital to small and medium size businesses. Craigslist has tons of job listings in this industry, and I’ve heard that some of these firms are looking to double their sales forces in the near future.
The cash advance business consists of both brokers and lenders that advance unsecured, uncollateralized loans with no personal guarantees required. Instead of charging an interest rate with minimum principal and interest payments, they are factoring services, and purchase a portion of discounted future credit card receivables, typically MasterCard and Visa receipts, but not Amex or Discover, as their processors are not set up to accomodate this service.
Unsecured lines of credit are interest only lines. The borrower has the option of paying interest only in any given payment. LOCs are typically extended for ten years, and rates range from 5-6% for good credits to 10% + for lesser quality ones.
This industry is booming and has a whiff of a late 90s dot com feel to it IMO. Maybe it’s 1997 with a couple years to go until the cycle turns.
Great article, Alex. The comments on your post by the business owners thus far, while not statistically representative, are also very interesting.
At the same time, I wonder if folks like Paulson (former Goldman Sachs CEO) and the folks in Washington might not be getting a sample of viewpoints heavily biased toward Wall Street bankers and their associates.
Something is missing from Appelbaum’s article. FDIC.
Substitute bridges are essentially the only way out. The ultimate challenge in current situation is to keep every price signal intact. This is the only goal.
Now think about it. How can bank deaths affect the price signals? No more loans to business, and deposits evaporate. The safety of deposits is an easy problem for the government. So, the issue here is to find credible bridges to lend money to business. But NOT JUST ANY business. You have to lend money to only those business that is healthy. Lending to unhealthy business is the reason we are here in this mess after all.
Now, the question becomes, who can we trust to lend money only to healthy business? Definitely not those failed banks.
I think the “bailout” is just an extraordinarily expensive method of transferring wealth to a relatively small number of Wall Street firms (run by Democrats) who made some rotten decisions at the behest of Congressional Democrats such as Barney Frank. Let them fail rather than give a giant incentive for others to do the same. Funds will continue to flow from savers to investors and the portfolios of all who weren’t grossly overinvested in mortgages will suffer only a little blip. The Fed, of course, needs to be mindful of short run liquidity questions -but that is all. Mr Bush seems to be as gullible here as he has been with the gigantic spending binge which occurred on his watch. The “Man-in-the-Street” is right on this one -no bailout.
I was having a good laugh yesterday contemplating Ford going to a local community bank and asking, “Can I open up a line of credit for $4 billion?”
In Ford’s case, only if it was a failing community bank. No healthy bank of any size would give a line of credit of any size to Ford, GM, or Chrysler.
Is it realistic?
if you make more interest story your blog will be better
it is so complicated
If there were no taxes on CDs for a year, then couldn’t that lead to frightened people moving their investments out of the stock market and into banks? Would that be desirable?
In Ford’s case, only if it was a failing cmunity bank. No healthy bank of any size would give a line of credit of any size to Ford, GM, or Chrysler.
In Ford’s case, only if it waa failing cmunity bank. No hethy bank of any size would give a line of credit of any size to Ford, GM, or Chrysler.
Wow…I didn’t understand much of that. Could someone paraphrase it for me? What’s the bottom line?
i always appreciate articles like this that help people educate themselves on important issues instead of just letting people be carried by others opinions and views.
I think that in order to stimulate the economy you need some savings so that people can put down money on houses and be able to get out of debt, but you also need the spread of money. This is always good for economies.
I agree with Philadelphia Dental Associates.
I don’t know, this problem has gotten so big its going to take a big government reform to pull us out of the hole. If we trusted the Banks to do the right thing we wouldn’t be in this mess in the first place.
I think that is an interesting thing to remember. Most banks are small local things with a small handful of branches. They have largely escaped the horrors of the giants.
think that in order to stimulate the economy you need some savings so that people can put down money on houses and be able to get out of debt, but you also need the spread of money. This is always good for economies.
I really need to brush up on my economics
I am still a believer that credit unions are better than banks because they are not trying to get a profit for their shareholders.
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