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Why is bank lending continuing to drop?
WSJ: Since the TARP was initiated in Oct 2008, there has been a 23% decline in new loans, as of Feb 2009.
Why are the banks not lending money after the banks have received aid?
What are the main issues associated with the TARP plan?
What are the main criticisms of the TARP program?
Why is the perception that banks are not loaning money upsetting the administration?
Why are the banks not lending money after the banks have received aid?
What are the main issues associated with the TARP plan?
What are the main criticisms of the TARP program?
Why is the perception that banks are not loaning money upsetting the administration?
answers (2)
Dave,
You are asking for a complete news magazine.
I will answer the first and the last questions for you.
Why are the banks not lending after they have received the aid?
Banks are lending. Several banks have reported massive increases in new mortgage loans and refinancings.
The 23% decline in new loans is related to the economy and is in no way related to the TARP.
There are two issues.
1)
Congress , and most "talking heads" are not smart enough to understand the concept of "pushing on a string". Adding new money to the system is like pushing on a string. If nobody is pulling on the other end, it is not going to move. When business people are afraid and uncertain about what the future will bring, they don't want to spend the money they have, let alone borrow more.
Consumers are also afraid. They don't want to spend the money they have, let alone borrow more. That is the reason all the auto makers are in trouble. People are not afraid of GM or Chrysler entering banruptcy, If that was all they were afraid of, they would be buying, Fords, Toyotas, and Hondas. All those brands are down in the neighborhood of 30% in sales.
New loans are down because nobody wants to borrow, not because the lenders want to lend.
2) All that aid went to the Banks. It was a capital injection, it's purpose was to allow the banks to have enough confidence in each other to lend and transfer money to each other. And to increase their capacity to make loans.
But.
Banks are a small player in the lending industry in this country. The overwhelming dollar volume of loans to business in this country are either through the commercial paper, bond, or securitized loan markets.
Several very large bond issues have been funded in the past few weeks and the commercial paper markets are beginning to work much better.
Neither the bonds or the commercial paper markets could function before the TARP funds were injected because the people selling and the people buying those securities did not trust the banks.
EXAMPLE:
You are the CEO of a Fortune 500 company. You want to raise 500,000,000 by selling bonds. To sell the bonds, The buyers have to pay 500,000,000 to the investment bank that is selling them and your proceeds will be deposited in a bank of your choice. If you are afraid that none of the big banks are safe, where would you put your $500,000,000. You could ? put put 100,000 in each of 5,000 banks. How would you like that? More likely that you would just wait.
Now let me ask you a question.
Assuming that you have a good job, you are making ends meet and are current on your mortgage but your company has already had some layoffs and you personally know five or six people that have already been laid off. This puts you in the same boat as 85% of all Americans.
Even if you needed a new car. Say your car is still reliable but getting a little tired. Would you go buy a new car this weekend?
The Administration is upset about the perception that banks are not lending because it points out two things.
1) They are NOT in control.
2) Even the general public who are generally very uninformed about the economy and financial issues have realized that they are not in control of the situation and that this massive shotgun spending on things that for the most part will not create jobs is not going to help.
3) Their plan will eventually work but as usual, they are fighting the symptom and not the cause of the problem. They are trying to put out a fire by spraying water on the top of the flames instead of the wood that is burning.
You are asking for a complete news magazine.
I will answer the first and the last questions for you.
Why are the banks not lending after they have received the aid?
Banks are lending. Several banks have reported massive increases in new mortgage loans and refinancings.
The 23% decline in new loans is related to the economy and is in no way related to the TARP.
There are two issues.
1)
Congress , and most "talking heads" are not smart enough to understand the concept of "pushing on a string". Adding new money to the system is like pushing on a string. If nobody is pulling on the other end, it is not going to move. When business people are afraid and uncertain about what the future will bring, they don't want to spend the money they have, let alone borrow more.
Consumers are also afraid. They don't want to spend the money they have, let alone borrow more. That is the reason all the auto makers are in trouble. People are not afraid of GM or Chrysler entering banruptcy, If that was all they were afraid of, they would be buying, Fords, Toyotas, and Hondas. All those brands are down in the neighborhood of 30% in sales.
New loans are down because nobody wants to borrow, not because the lenders want to lend.
2) All that aid went to the Banks. It was a capital injection, it's purpose was to allow the banks to have enough confidence in each other to lend and transfer money to each other. And to increase their capacity to make loans.
But.
Banks are a small player in the lending industry in this country. The overwhelming dollar volume of loans to business in this country are either through the commercial paper, bond, or securitized loan markets.
Several very large bond issues have been funded in the past few weeks and the commercial paper markets are beginning to work much better.
Neither the bonds or the commercial paper markets could function before the TARP funds were injected because the people selling and the people buying those securities did not trust the banks.
EXAMPLE:
You are the CEO of a Fortune 500 company. You want to raise 500,000,000 by selling bonds. To sell the bonds, The buyers have to pay 500,000,000 to the investment bank that is selling them and your proceeds will be deposited in a bank of your choice. If you are afraid that none of the big banks are safe, where would you put your $500,000,000. You could ? put put 100,000 in each of 5,000 banks. How would you like that? More likely that you would just wait.
Now let me ask you a question.
Assuming that you have a good job, you are making ends meet and are current on your mortgage but your company has already had some layoffs and you personally know five or six people that have already been laid off. This puts you in the same boat as 85% of all Americans.
Even if you needed a new car. Say your car is still reliable but getting a little tired. Would you go buy a new car this weekend?
The Administration is upset about the perception that banks are not lending because it points out two things.
1) They are NOT in control.
2) Even the general public who are generally very uninformed about the economy and financial issues have realized that they are not in control of the situation and that this massive shotgun spending on things that for the most part will not create jobs is not going to help.
3) Their plan will eventually work but as usual, they are fighting the symptom and not the cause of the problem. They are trying to put out a fire by spraying water on the top of the flames instead of the wood that is burning.
source(s):
Financial News, Many sources.
McDonald's, I go there for breakfast every morning. I hear people of all ages and all races talking about the stupidity of the stimulus plan.
Example - one group of bottled water delivery people included two white guys, two African Americans, One Hispanic guy and one Asian woman. ( That is about as representative as you can get in a small group.) They were all talking about the stimulus package and how stupid it was and they were angry about it because they didn't want to pay to bail out some executive who bought a million dollar home and lost his job.
Financial News, Many sources.
McDonald's, I go there for breakfast every morning. I hear people of all ages and all races talking about the stupidity of the stimulus plan.
Example - one group of bottled water delivery people included two white guys, two African Americans, One Hispanic guy and one Asian woman. ( That is about as representative as you can get in a small group.) They were all talking about the stimulus package and how stupid it was and they were angry about it because they didn't want to pay to bail out some executive who bought a million dollar home and lost his job.
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Have bonds become the new equity?
The problem could be that more and more financial institutions are trying to get away from 100% financing. Lenders take out insurance policies on high dollar loans (think GAP insurance, only for the bank), in case that you cannot pay the loan back. Some of those insurance companies are refusing to cover leins over 97% of the purchase price. So that the automagic depreciation on new purchases has already been partially covered by the downpayment.
Or the insurance policy may not cover people with high risk scores and low credit. So, a financial instution may not be able to give someone a loan in the amount they need. Further increasing the up front money they might need to secure a loan.
All and all, the financial institutions are trying to be smarter about who they loan to. To make up for all the mistakes and poor choices they made earlier.
My advice for people having a hard time getting loans? Go to a credit union. Most credit unions have ALWAYS followed smart practices dealing with consumer loans, so there hasn't been a huge change in their policies in dealing with new members. They don't have years of bad debt and foreclosures to make up.
Or the insurance policy may not cover people with high risk scores and low credit. So, a financial instution may not be able to give someone a loan in the amount they need. Further increasing the up front money they might need to secure a loan.
All and all, the financial institutions are trying to be smarter about who they loan to. To make up for all the mistakes and poor choices they made earlier.
My advice for people having a hard time getting loans? Go to a credit union. Most credit unions have ALWAYS followed smart practices dealing with consumer loans, so there hasn't been a huge change in their policies in dealing with new members. They don't have years of bad debt and foreclosures to make up.
source(s):
I work at financial institution.
I work at financial institution.
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Will try and answer my questions as I've stated them?
* Banks are lending ( my response: the big banks are cutting back lending)
* Consumers and business are afraid to borrow ( my response: demand and supply are both low) (however, real estate wise there are alot of bargin buying, for example in Arizona)
Did you intentional avoid answering the TARP questions?
What are the main issues associated with the TARP plan?
What are the main criticisms of the TARP program?
Banks are a small player in the lending industry in this country. The overwhelming dollar volume of loans to business in this country are either through the commercial paper, bond, or securitized loan markets.
Does TARP cover financial aid for:
commercial paper (No)
bonds (No)
securitized loan markets (CMBS, MBS)
Maybe the government will buy a good chunk of MBS but CMBS is not covered.
Let's keep this simple. TARP doesn't cover CMBS. CMBS will require a bailout.
MBS purchases of $1.25 trillion are subsidizing home loans buy reducing yield percentages. The 20/30 year mortgage rates are at all time lows. The low rates have a stablizing affect.
Commercial paper loans are about half from their peak of $2.2 trillion and a small change in the amount of loans has been noticed.
The difference between corporate bond yield and us treasuries have investors concerned about business ability to pay down debt.
Manufacturing productivity has been gaining strength.
Chinese and Japanese imports have declined significantly.
China and India consumption are up and hope is being spread these two countries will raise from their lows.
and yes, I deliberately ignored the TARP issues.
I spent an hour on that question as it was. The pro and cons issues of the of the TARP program are way more than I am willing to tackle "for grins". Those tarp issues would take three or four hours of resarch and ten to twenty pages to cover in a responsible way.
I'm very hopeful for China and believe it will absorb alot of the debt.
You should take a look at "When Markets Colide" by Mohamed El-Erian.
Get it at the library you will only read the first thre or four chapters and it is not a book you need to keep. He has a very interesting analysis of China and India.
http://www.listensoftware.com/lsscontent.aspx?process=LoadView&SiteId=4&txtContentId=4039
Derivative products have enabled a far greater degree of linkage across markets, at any time. BIS estimates, end of Jun 2007, the derivatives market to be $516 trillion. Credit Default swaps have shown the fastest growth. The visible revolution of derivatives has been the mortgage products.
The linkage seemed to be expanding up the 2008, with OTC derivatives topping $684 trillion. However, in 2009 the derivatives drop below $600 trillion. A sudden drop in the derivatives market suggest global contract rather than expansion, moderate inflation, and more unemployment.