The Return of Lending: Still Distant

Andrew Ross Sorkin gets an astonishing, if anonymous, quote this morning:

"It doesn't matter how much Hank Paulson gives us," said an influential senior official at a big bank that received money from the government, "no one is going to lend a nickel until the economy turns." The official added: "Who are we going to lend money to?" before repeating an old saw about banking: "Only people who don't need it."

This is not good, clearly. The economy isn't going to turn for some time yet -- it could easily be another year before we start seeing sustainable positive growth rates. And if this sentiment holds, the government's recapitalization plan really will be for the sole benefit of Wall Street, with Main Street getting nary a look-in.

On the other hand, it's entirely possible that the sentiment won't hold. Libor's below 4% and TED's down to 261bp, which means that interbank funds are finally moving again, albeit in small and intermittent quantities. And it might well be that the anonymous senior official in Sorkin's story comes from an institution with more solvency worries than most.

But interbank lending still doesn't help Main Street unless and until banks get around to real-world lending. And while bank credits are improving, thanks to implicit and explicit government bankstops, real-world credits are only getting worse, thanks to the worsening recession.

I must admit, too, that if I was a banker, I too would be cutting back on lending right now. There's a lot of denial out there: I've spoken to a large number of people in recent days, for instance, who are still convinced that the best way to build wealth is to buy a home -- even here in Manhattan, where prices have barely begun to fall. Inevitably, a large proportion of the people wanting to borrow from the bank will be the people most in denial about where their finances are going.

Given that we're headed into uncharted macroeconomic territory, I wouldn't have a huge amount of faith in my branch-level employees to be able to underwrite the kind of requests they were receiving -- especially since, in recent years, they haven't been allowed to underwrite loans, and have been little more than data-entry robots plugging numbers into computers. Yes, we need to move to a world where there are much stronger branch-level relationships. But no, that can't be done overnight, especially not in the middle of a severe recession.

When we do start coming out of the recession, however, I have hopes that banks will start doing their jobs again, rather than using credit cards as their primary vehicle for extending credit to individuals and small businesses. The move to plastic was very profitable for the banking system, but it could go very sour very quickly now. It's time to return to old-fashioned bank loans, extended and received by people rather than datasets. But that, of course, will take time.