At least part of the reason behind the back-to-back triple-digit gains in the Dow Jones Industrial Average this week is the market’s recognition that the administration’s plan to penalize the banks is unlikely to ever become law. Thus, the fear of what might come next has given way to the reality that the proposals may not get very far in Congress.
As much as the president has tried to punish the banks for their role in the worst recession since the 1930’s, someone in the administration appears to have reminded Mr. Obama that they kinda need the banks in order for the recovery to pick up steam. In a town hall meeting in Nashua, New Hampshire Tuesday, the president put the blame-game aside and touted new measures designed to encourage banks to lend.
The plan, which Obama introduced in his State of the Union address on January 27th, is to take the money the government has gotten back from the TARP and offer it to banks with rates as low as 1%. The administration hopes that by providing capital at low rates, the banks will be more inclined to lend to small business across the country.
"This will help small banks do even more of what our economy needs -- and that's ensure that small businesses are once again the engine of job growth in America," Obama said.
According to the latest Senior Loan Officer Opinion Survey on Bank Lending Practices, on net, big banks are more willing to lend now than at any time since the credit crisis began. During the last quarter, big banks actually eased lending standards on large business loans for the first time since the second quarter of 2007.
Another part of the banker survey showed that banks were also more willing to make consumer loans. For the first time in nearly three years, lending standards for all types of consumer loans were unchanged and not a single bank reported that they had increased lending requirements.
However, as the saying goes, you can lead a horse to water, but you can’t make him drink. Despite the government’s desire for banks to lend more and the fact that banks have actually been easing up on lending standards recently, the bottom line is the demand for loans continues to fall. The Loan Officer Survey showed that demand for business loans as well as consumer loans remains poor.
From an economic standpoint, the plan to make more capital available for banks to lend is certainly reasonable and sound. And there is certainly an abundance of anecdotal evidence that points to the fact that smaller businesses do not have the access to the capital right now that they need in order to grow (and hire). Thus, any plan to increase the availability of capital is likely to be beneficial in the long run.
However, with consumers having experienced two of the worst bear markets in a generation over the last ten years and seen the value of their homes plummet, taking on more debt isn’t likely to be part of the plan for John Q. Public and his family. Thus, we will argue that the consumer is experiencing a generational change in their attitude toward debt.
This is one of the primary reasons that the current economic expansion, which does appear to be underway, is likely to be less than robust from a big-picture standpoint. Therefore, as investors, we will need to watch consumer behavior and bankers’ willingness to lend as the economy improves.
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