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Substitute Bridges
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 .
Posted by Alex Tabarrok on September 27, 2008 at 07:36 AM | Permalink
Comments
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.
Posted by: Henri Tournyol du Clos at Sep 27, 2008 8:36:32 AM
I own a small business (in the DC area) with 2 lines of credit from 2 separate banks.
Both banks contacted us in the last week wanting to increase the limit on the lines AND one offered to reduce the interest rate for 6 months from 7.5% to 5%. Which is not so attractive as the other line has been at 5% for at least the last 6 months.
Also in the last month, we have had increases on the limit of 2 of our business credit cards, and I have had the limits increased on 2 of my personal credit cards.
We did not ask the banks for any of these increases or offers.
Realize this is a sample size of one, but as a small business (we've been in existence about 10 years) we are not finding getting credit to be a problem.
Posted by: at Sep 27, 2008 9:18:37 AM
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.
Posted by: Bill Stepp at Sep 27, 2008 9:40:33 AM
Federal Reserve figures showing bank loans 6% up on a year ago would normally be interpreted as a weak signal pointing towards the possibility of higher interst rates.
One third of the finacial sector's problem, the least urgent third, is complex bad debt to work off. The Paulson plan is aimed at a large part of this.
Another third is lack of equity capital. For over a year far too many financial institutions that need (or for the late lamented, needed) new capital to offset losses and to reduce leverage have refused to pay the market price for it. As a result, the institutions regard one another as insufficiently credit worthy. This crescient distrust produces the monster in the shadows.
The third third of the financial sector's problem is simple panic; not least in the Treasury and the Fed. This is by far the most urgent third to deal with. Tabarrok and others who are demonstrating to those who are spooked by the monster in the shadows that it is really not a bad day outside; and outside is where we live, not in the shadows; Are doing what most needs doing now.
The plain fact that the Paulson plan as presented was unthought-out and virtually unworkable has added confusion to panic. This has prevented its promise of ample funding from giving markets value for money in increased confidence.
Posted by: David Heigham at Sep 27, 2008 9:40:50 AM
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.
Posted by: a student of economics at Sep 27, 2008 10:25:48 AM
I had Professor Dunkleberg around this time last year at Temple, and he was arguing then as he is now that "the fundamentals are strong", so it's unsurprising to hear him still arguing that now. He would have argued it in 1929 too.
Posted by: templestudent at Sep 27, 2008 10:55:16 AM
Something is missing from Appelbaum's article. FDIC.
Posted by: Bernard Yomtov at Sep 27, 2008 10:56:24 AM
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?
Posted by: Jim at Sep 27, 2008 12:04:48 PM
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.
Posted by: Moo X at Sep 27, 2008 12:23:39 PM
I'm hearing the same thing from my dad's company, a medium-sized bank in Ohio. Banks that handled their money wisely in non-housing-bubble areas have not seen a huge rise in defaults that would make them horde cash. They can operate their money from savers on main street to borrowers on main street without ever touching wall street.
By contrast, 1929 and 1987 saw a huge rise in the number of smaller banks going under due to a much more widespread overinvestment in those times. In particular, farmers were unable to pay back the myriad of rural bank loans due to the dust bowl and other factors.
So, would a panic still happen on main street if the Treasury did not buy toxic assets on wall street? What mechanism would this happen with most banks still operating on main street? Would the giants of main street banks, Bank of America, JP Morgan and Citi(/Wachovia?) stop lendingf for sound businesses and construction projects on main street?
Posted by: Matt at Sep 27, 2008 2:52:37 PM
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.
Posted by: Critic at Sep 27, 2008 7:07:22 PM
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?"
Posted by: Norman Pfyster at Sep 27, 2008 10:59:50 PM
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.
Posted by: at Sep 28, 2008 2:55:18 PM
And the more cheap mesos is very good for you.
Posted by: cheap mesos at Jan 1, 2009 10:07:58 PM
Is it realistic?
Posted by: sky at May 14, 2009 3:35:33 AM
it is not a bad story
Posted by: lily at May 14, 2009 3:36:09 AM
if you make more interest story your blog will be better
Posted by: anna at May 14, 2009 3:37:56 AM
