Greedy Bankers Not Entirely to Blame

For a few bracing hours yesterday, everything seemed right with the world: stocks were getting pounded, gold and silver were moving energetically higher, and crude oil was plummeting just as it should in a world that is sinking into the mire of recession-or-worse. It was a welcome change from the surreal, feel-good mood that has pervaded the bourses in the U.S. and elsewhere since early March. Even the Wall Street Journal deferred to reality with this dog-bites-man story atop the front page: Bank Lending Keeps Dropping.  Shocking, you say? Or should we merely feign outrage, as the Journal did when it wrote: “Political disquiet over banks’ perceived lack of lending, as well as their spending on bonus and perks, has provoked skepticism about the administration’s ability to revitalize the banking system.”

 While the skepticism is warranted, it’s obvious the Journal doesn’t understand what’s going on. Like the Obama administration, the newspaper is concerned that the major banks, greedy and depraved as ever, have curtailed lending now that they’ve gotten their bailout money and paid out a hefty chunk of it in the form of bonuses. This is true, of course, but it only tells half the story. The other half is that consumers are simply not in a borrowing mood, to put it mildly, and that lower interest rates aren’t going to change that.

 Real Estate Epiphany

There are two reasons for this, one of which has been widely acknowledged by the news media: We have all become obsessed with paying down debt. But the second reason is subtler and appears not to have been factored into monetary policy. It is the stark realization by most Americans that real estate values do not necessarily have to rise. Before this epiphany, many found it all too easy to borrow because their net worth was growing along with the value of their homes. Now this ephemeral wealth is shrinking, creating fear among would-be borrowers where once there was certitude.  

As a result, tens of millions of Americans have done the math and concluded that, even if they don’t borrow another penny for the rest of their lives, the dream of retirement will be extremely difficult to achieve.  And to what end would we be borrowing all that money supposedly sitting in the banks? To pay more for homes than they’re worth?  As far as we can tell, that has been the primary goal of bailout-mania from the beginning. For once, though, the public seems to understand that we cannot possibly borrow our way back to prosperity. How long will it take before our political leaders reach the same conclusion?

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