Lend…or else

More good credit. Credit hasn’t just frozen for the dubious housing backed securities, but for everything else as well. What credit primariliy needs to be available for is businesses, so that the value they generate can add to the actual wealth of our economy, rather than the nebulous paper wealth that’s come from the stock market.

Banks have to get back to evaluating the business plans that are put to them rather than just the apparant worth of the collateral being put up.

As for what the “or else” might be.. the government may decide to shoe-horn itself in to provide the credit itself if the banks are unwilling. The “or else” can also be increasingly tight legislation on the activities of banks, and tranparancy requirements on CEOs that may make their lives extremely uncomfortable.

It wasn’t credit, per se, that was the problem,

it was the irresponsible granting of credit (by a select group of large American institutions) to folks who otherwise were high credit risks.

Not passing on the rate changes is a reflexive and irrisponsible opposite response. Rather than simply lowering rates (which has little to do with risk, and everything to do with propensity) means they’re just pocketing the difference.

Assuming everyone who relies on credit is high risk, is simply wrong, and economically dangerous.

Throwing the baby out with the bath water is never a good idea.

Sisyphus,

It is a bit of both. The loans were assets that backed the derivatives. So the derivatives allowed the radiation to be spread, but lets be clear that the source are loans that have gone bad. The second problem with the derivatives is that the cloak the problem….you cannot draw a straight line from A to B with them and say Bank 1 has $50 of bad loans because they invested here. The slicing and dicing and “spreading of risk” combined with the lack of due diligence from origination up to 2nd and 3rd order derivatives meant nobody really knows. That cuts to trust and that cuts to the heart of it all.

I dont blame poor people, except in as far as they took on oligations they couldnt afford, or at least some did. Clearly some rich people did as well….no documentation loans didnt go just to the poor, but the poor make up a disproprotionate chunk of those lonas and those loans make up a disproprortionate part of loans that went bad.

Making loans to people who cannot afford it in large amounts and in large numbers IS the source of the problem. But it isnt the only problem.

Now as for the Lend or else….what is missing from the debate is analysis. There has been a retraction of lending, no question. the question is from who. Are canadian banks lending less. Yup. Probably correctly so, especially in the mortage market. I know of a number of stories where people have bought new homes and are caught by tiiming, either the bank has re evaluated the value of the house being purchased, ie a new build or people bought before they sold and now they cannot sell their old house.

As sad as these situations are, and there is real personal hardship in some…people will lose life savings or homes…..they are timing issues but the banks are legitimate in not lending.

Car financing has dried up because non bank lenders have withdrawn…..GE Money was supplying floor financing to many motor sport and recreational vehicle franchises..thats gone…..they and others would have been supplying lending to heavy equipment leasing, thnk Catepillar dealers and Komatsu dealers…..Canadian banks havent been in this risky business for quite some time and arent equipped to step forward.

Canadian Banks supply funding to lots of businesses directly, and some others indirectly, through channels and thrd parties……but there are lots and lots of niches and segments they dont go near and havent gone near for some time. These are the markets that cant get funding.

So should the banks be forced into markets they dont know and have chosen to abandon….not really….should they government consider some other targetted assitsance, maybe, assuming they could do some good but thats a big if. It isnt clear that these other markets are strategic.

Trade financing is one place the government has and does do some good. Letters of Credit are an obscure but critical part of an open economy like ours.

I would like to see more analysis as to where credit has been removed and by who. My suspision is that most Canadian banks havent done anything more than a credit quality check, tightened up some lines, arent growing lines (important for the long run) and are asking for more collateral or security.

I suspect most problems are due to foreign banks and non bank lenders, who were playing in markets Canadian banks didnt like anyway.

Other than that it is politics….if Flaherty wasnt tongue lashing them then the Jack Layton would be tongue lashing Flaherty…but I await real analysis and real evidence to back up either claim..

Over to you Mr Maich

Sisyphus – I sympathize with your frustration. It was a popular name in the 60s and 70s. But I hardly ever see a little kid named Steven these days, so just wait 30 years and the problem should be solved.

As for credit – I should make it clear that I am not against it. Of course there is good debt and bad debt, and the system can’t operate without lending. It’s just that it has become an article of faith that perfectly good credit risks have been unable to get loans because the banks are suddenly afraid of their shadows. I’m just saying I am not positive that’s true. There have been a handful of indicators and studies suggesting that good credit risks can still get loans (albeit a bit more expensively) and that the people who are being rejected, probably are being turned down for good reason as banks try to repair their capital levels and risk profile.

I’m not sure how to embed links, so here is one such study:
http://www.cato.org/pub_display.php?pub_id=9685

Put another way – I get suspicious when politicians start telling banks how to lend, unless they can definitively demonstrate that they know better how to allocate private capital. but it is certainly good politics for Flaherty to go to war with Bay Street.

Steering municipalities and provincial gov’ts to take on capital expenses, ie infrastructure projects funded by large loans, is likely the most logical conclusion, as opposed to prodding the banks to give cousin Jed and Aunt Judy money for a second car purchase or pomegranate jam proposal — unless they’ve proven it to be financially viable, of course.
There definitely needs to be pressure put on credit card lending agencies, altho they legally can say ‘you signed it’… I know that you can negotiate your cc interest rate down if you ask, but shouldn’t they be leading the way here and dropping them precipitously for say a 6-month window? By not doing that, they are preventing honest people from climbing back off the ledge.

The banks have made Mark Carney irrelevant. That’s not good.

In any credit market there are two major elements, price and qualification. Lending is weird business, where they spend time encouraging you to come to them only so you can be judged, but thats another story.

Sowe are all Price has definitely gone up….people are paying higher rates for and or providing more security for the same rates as before. Quaification has apparently tightened, over and above price. This is what waiting for some kind of proof on. It is clear that some copanies have abandoned the space, foreign credit card lenders are definitely less active. Now that I think about it I used to get two or three cc offers a month, now they appear to have ceased….hmmm have to watch for those.

But car lending and leasing are the clearest example of it being more difficult. Apparently there were stories of working capital being tightened. But Mr Maich, it would be nice to see these documented….I can’t say I have seen that, maybe you just need to make a call to the Canadian Manufacturers Association or the Canadiana Association of Small Business….I am sure they are running surveys.

So price is clearly up, but are we seeing restriction on qualification over and above the marginal price moves, i.e. banks refusing to put money out period in certain sectors?

Remember, the concern in October/November was that the settlement mechanism was going to freeze up. The implication of that was that banks would only accept cash from each other….given that everyday occurences of settlement are credit card receipts from stores and payroll from companies to employees flowing through these systems, this was a pretty serious threat. In Iceland this did actually happen….other banks froze Icelandic bank issued Visa, MasterCards and debit cards….the worry is this would spread. That worry is over and now we are into whether companies are getting the funding to do business. The two issues, what we faced in October/November and what we face today are two fundamentally different questions.

Personally, I think banks are being skittish and will remain so until after they see results post Christmas, those are credit card payments, bulge loan repayments and year end results from businesses, along with negotiations for lonas etc from their customers.

One more issue, RSP season. Banks will want to see that there is inflow. As long as they are not net redemptions then Banks might feel that their need for cash has lessened and they can start putting it to work, assuming they can find opportunities. I truely believe that if we get through Christmas without blowing up then life returns to a more normal pace in the spring. That means no more crisis, just a run of the mill recession…..assuming no blow ups. But at that stage the Canadian Banks will be swimming in cash, and their business is making money between the money they have and the money they lend.

Sisyphus, like you I would like to see some data that loans have dried up over and above normal lending. My hypothesis is still that non bank lenders have definitley pulled back and that traditional banks havent filled the gap…you then end up with the question of why should they when they werent in those markets before.

From a policy perspective, the government needs to be concerned about if and how non bank lending will be replaced, trade credit, receivables factoring, floor financing, consumer receivables etc. as well as watching whether Banks are strangling credit to medium sized businesses. The German government put out a plea to its Banks to ensure that its large family owned business sector of medium sized companies wasnt going to be side swiped.

There is limited things the government can do, but getting the facts would be a start. Not politicizing it would be another thing to do, but we already discussed that one.

I only frequent one other forum and that was fully anonymous when I joined it, so when I signed in here I signed in under Sisyphus – who was the first mythological figure that I ever read about many decades ago – because that is what I thought everybody did. Besides I kinda admire the old bugger.

Anyway , Olaf, rational discussion ( myself not always included ) has its’ own credibility.

Then, again, maybe my real name is Steve …….