Monday, October 27, 2008

So When Will Banks Give Loans?

So reads the title of Joe Nocera’s most recent article in the New York Times, maybe only the online version.

The article is based on information from an internal JP Morgan conference call. The implication is that despite the Feds having given billions to the banks in the form of preferred stock investments, the banks are in no hurry to lend again, and may not be lending for a long while. OK.

The idea that banks are never going to lend again is preposterous.

Banks, even those with adequate capital, are afraid to lend now. For any individual bank this situation has considerable inertia because nobody else is lending either. There will come a point, and it will not be announced in advance on CNBC, when Bank A makes a new, daring and very profitable loan. Bank B will notice. That is what they do. Bank B will then go out and find somebody to lend to.

Banks can’t grow profits without making new loans. Any well-capitalized bank in a decent environment will find someone to lend money to. We aren’t in a decent environment now but will be again.

In addition, the banks were forced to take those billions at a 5% interest rate. If they buy 10 year Treasuries with the money they would have a negative return, which wouldn’t play very well in the next shareholder meeting.

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