Why banks won't loan $ to small business.

[futurebeachbum]

I've been complaining about the lack of interest in the Federal Government in helping small business (where 80+% of new jobs are created.)

I wondered why with TARP funds and low interest rates why bank lending has continued to contract. Why won't they loan money?

The answer, I found out today, is that we've built a system where banks can make money without making loans.

From Ellen Brown at Counterpunch "How Banks Make Money on Low-Interest Loans"

?Keeping short-term rates low . . . is particularly helpful to the big banks like Bank of America (BAC) and JPMorgan (JPM). Their raw material is short-term money, which is effectively free right now. They can borrow at 0.25% or less, and then turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking in an almost risk-free profit of 2.25%."

That's right, banks can borrow money from the government, basically for free (<= .0.25%) and then, instead of taking on risk and loaning those funds out, they invest them in T-bills and earn 10-20x the interest rate they are paying.

Guess who has invested more in our politcians....small business or bankers?

 

[idlewind]

I've been complaining about the lack of interest in the Federal Government in helping small business (where 80+% of new jobs are created.)

I wondered why with TARP funds and low interest rates why bank lending has continued to contract. Why won't they loan money?

The answer, I found out today, is that we've built a system where banks can make money without making loans.

From Ellen Brown at Counterpunch "How Banks Make Money on Low-Interest Loans"



That's right, banks can borrow money from the government, basically for free (<= .0.25%) and then, instead of taking on risk and loaning those funds out, they invest them in T-bills and earn 10-20x the interest rate they are paying.

Guess who has invested more in our politcians....small business or bankers?

Talk about a ponzi scheme.

 

[Mango]

What the author of that article failed to acknowledge was that, just like anyone else who buys T-bills, the Banks are subject to inflationary pressures. Also, she doesn't address the issue of why a Bank would buy T-Bills and earn 2.25% vs. making a loan and earning 4.5% or more. If the applicants were so credit worthy, it would be a no brainer. No?

In 2009, the larger Banks had over 4 trillion to lend, however, there was no demand. Bankruptcy filings were up 32% and many people were also saving money vs. spending it.

What the government needs to do is loosen up the standards and find a happy balance. We all know what happened when the underwriting guidelines were much more loosey goosey.

I'm not saying that small business is not feeling a credit crunch. People who have excellent credit, new businesses with a good business plan, and existing businesses with some collateral looking to expand should have better access to credit; but the author of that article is making it sound like the government is colluding with Banks to keep small businesses in the crapper.

 

[Lynnie]

This economic downturn has been so long (money isn't flowing in the markets with consumers) that I believe small business owners of a miniscule amount of affluence have experienced some credit dings, hampering their ability to obtain loans from big banks. Their financials are weaker than normal, showing less cash flow, etc. They are probably borrowing from family and other private money resources. I don't think we should go back the loosey goosey underwriting guidelines, but there does need to be some common sense underwriting. If someone had stellar credit until 2009 or 2010, one can surmise why the credit score isn't as high as it once was.
I think there are more heads to fly with this issue.

 

[Koa]

I've been complaining about the lack of interest in the Federal Government in helping small business (where 80+% of new jobs are created.)

I wondered why with TARP funds and low interest rates why bank lending has continued to contract. Why won't they loan money?

The answer, I found out today, is that we've built a system where banks can make money without making loans.

From Ellen Brown at Counterpunch "How Banks Make Money on Low-Interest Loans"



That's right, banks can borrow money from the government, basically for free (<= .0.25%) and then, instead of taking on risk and loaning those funds out, they invest them in T-bills and earn 10-20x the interest rate they are paying.

Guess who has invested more in our politcians....small business or bankers?

Makes me question more about Alex Sink (former state president for NationsBank (bank of america) being potential governor for Florida.

 

[30ashopper]

What the author of that article failed to acknowledge was that, just like anyone else who buys T-bills, the Banks are subject to inflationary pressures. Also, she doesn't address the issue of why a Bank would buy T-Bills and earn 2.25% vs. making a loan and earning 4.5% or more. If the applicants were so credit worthy, it would be a no brainer. No?

In 2009, the larger Banks had over 4 trillion to lend, however, there was no demand. Bankruptcy filings were up 32% and many people were also saving money vs. spending it.

What the government needs to do is loosen up the standards and find a happy balance. We all know what happened when the underwriting guidelines were much more loosey goosey.

I'm not saying that small business is not feeling a credit crunch. People who have excellent credit, new businesses with a good business plan, and existing businesses with some collateral looking to expand should have better access to credit; but the author of that article is making it sound like the government is colluding with Banks to keep small businesses in the crapper.

Unintended consequences maybe, but really, there are very few low risk small business plans and few small businesses looking to expand, so the t-bill option is obvious. There's no risk of inflation at this point either.

 

[scooterbug44]

It isn't just that there is no demand - the banks have overreacted and are being ridiculous. There are still people out there w/ money and jobs who want loans and mortgages. Many of my peers can actually afford homes and property now - and the banks act like they are serial killers.

If they had a mere fraction of their current standards years ago we wouldn't BE in this current mess. (An opinion I have shared with lenders sitting across the desk from me.)

Not only are they hurting small businesses, but many people are just paying cash out of frustration or finding alternate financing.

I do think the banks should not be allowed to buy t-bills or whatever w/ money they are supposed to be lending.

 

[idlewind]

It isn't just that there is no demand - the banks have overreacted and are being ridiculous. There are still people out there w/ money and jobs who want loans and mortgages. Many of my peers can actually afford homes and property now - and the banks act like they are serial killers.

If they had a mere fraction of their current standards years ago we wouldn't BE in this current mess. (An opinion I have shared with lenders sitting across the desk from me.)

Not only are they hurting small businesses, but many people are just paying cash out of frustration or finding alternate financing.

I do think the banks should not be allowed to buy t-bills or whatever w/ money they are supposed to be lending.

If it is their capital I don't care what they do with it. But to borrow money from the government ( or even worse take handouts from the government) and then lend that money back to the government at a higher rate is disgraceful and should be a felony.

 

[30ashopper]

Wouldn't a loan be a liability on a balance sheet, while a t-bil would be counted an asset?

 

[Mango]

Unintended consequences maybe, but really, there are very few low risk small business plans and few small businesses looking to expand, so the t-bill option is obvious. There's no risk of inflation at this point either.

Right now risk is low, however, there is always the perception of inflation and risk of the market getting spooked for any reason, ie; Fed's not withdrawing stimulus fast enough, unemployment figures.

If it is their capital I don't care what they do with it. But to borrow money from the government ( or even worse take handouts from the government) and then lend that money back to the government at a higher rate is disgraceful and should be a felony.

I know it sounds evil on the face of it, however, who else is buying Treasuries?? Certainly not China and Japan like they used to and neither is Joe the Plumber. Rates have no where to go but up and the value of their bonds will go down; so in essence, if they cash them in at some, we, being the US, are paying less back.