Sick and Tired of Debt

I have said it many times. The scourge in the US system is not a lack of credit, “tight credit“, “frozen credit”, or whatever else the Bernankes, Geithners, and Obamas would have us believe. Nor do we need to get “credit flowing again”, “consumers borrowing again” or anything remotely close to it.

We need the opposite: Savings. We got to where we are because of too much debt and credit. People over leveraged themselves into bankruptcy, they are sick and tired of debt. Borrowing has plunged and consumer credit will continue to contract precisely for that reason.

Rarely does anyone stop and ask the question: “Do people actually want to borrow any more money?” Of couse they don’t, why in the world should they?

Kelly Evans writes Worries About Economy Weigh on Loan Demand:

Maria O’Brien, a 27-year-old free-lance writer, and her husband are planning to do something later this year that they would have thought crazy in the past: buy a minivan — with cash.

“It’s worth the sacrifice right now to get out of debt,” Mrs. O’Brien said. “It means living more frugally, but also more freely.”

Banks are under fire for not lending enough and for tightening terms of credit, contributing to a drop in U.S. economic activity. But as the O’Brien family illustrates, the loan market’s shrinkage isn’t just about the supply of credit. It is also about weak demand for credit, a byproduct of households and businesses wary about the economy.

I would actually contend that the sole reason for lack of lending is the weak demand for credit. Banks have been flooded with excess reserves:

Meanwhile consumer credit continues to contract.

She goes on to write:

“Lending money is the bread and butter of banking,” said James Chessen, chief economist for the American Bankers Association. “The money is there, but banks are running smack into a wall of poor loan demand.”

The O’Briens, who live in Front Royal, Va., with their three children, are putting aside at least $500 a month toward the purchase of a used minivan in the $6,000-$8,000 range. They are also imagining a debt-free future.

“Once we get rid of it, we’re never going back,” Mrs. O’Brien said.

As consumer spending contracted last year, growth in household borrowing screeched to a halt in the fourth quarter after growing at a 10% annual clip earlier this decade, according to the Federal Reserve.

“We’re in a recession, and it’s one where households came in highly leveraged,” Fed Chairman Ben Bernanke said recently. Combined with firms “cutting back on their investment,” he expects to see weak demand for loans.

Loan demand began to fall sharply toward the end of last year and continued to weaken in the first three months of this year, according to the Fed’s periodic survey of bank senior loan officers. A pick-up in demand for mortgage loans is a notable exception.

In the latest survey, for instance, 18 banks said demand was moderately or substantially weaker than three months earlier, but only nine said it was moderately stronger. On balance, the Fed said, 60% of U.S. banks reported weaker demand for commercial and industrial loans.

The O’Briens have long dreamed of being debt-free. But they began to pay off loans more aggressively after Jeff O’Brien’s construction work dried up last year, leaving them at times without steady income to support mortgage, car, credit-card and student-loan payments. Mrs. O’Brien took on more free-lance work, while her husband transitioned into a career as an insurance adjuster.

In the meantime, they have scrimped and saved to pay down a third of their $30,000 credit-card and student-loan debt and sold Mr. O’Brien’s beloved Ford truck to eliminate that monthly payment. Aside from the mortgages on their two houses — one they live in, and one they rent out — they are planning to be debt-free by next April.

“Once we do that, we’ll tackle the mortgages,” Mrs. O’Brien said.

They aren’t alone. At Arizona Central Credit Union in Phoenix, which has 70,000 members, loan applications plunged last fall as the financial crisis intensified. The credit union saw more than 3,000 loan applications in September, totaling $13.9 million, a “fairly normal” month according to chief lending officer Patty Aker. That dropped to 2,300 applications in October, just over 1,000 applications in November and 900 in December. Loan applications rose slightly in January, then dropped again in February, to 895, totaling just over $4 million.

“We’ve got money to lend, it’s just that people were so nervous about what was going on in the economy,” Ms. Aker said. “So many people had lost jobs or were afraid they’d buy a car and then GM wouldn’t be around anymore to honor their warranties.”

More than two-thirds of Arizona Central’s $285 million loan portfolio are vehicle loans; the rest is comprised of other types of consumer loans and a small amount — about 10% — are small-business loans.

Across town, the National Bank of Arizona, primarily a business lender, is seeing a similar drop in demand. Business applications for new-equipment leases tumbled 28% in the first four months of this year, compared with the same period in 2008. Loan applications from small businesses are down 11.5%.

“Deal flow just came to a screeching halt” late last year, said Brent Cannon, executive vice president at the bank. He added that because many small businesses use their home equity as collateral, woes in the Phoenix real-estate market threaten to keep a lid on demand.

Lending can’t be forced. This is the End of Consumerism in action. Credit expansion only goes on for as long as the people play along. When they’ve had enough, they’ve had enough.

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Lending Can’t be Forced

Moneymorning writes As Big Banks are Criticized for not Lending, Small Banks Find They Can’t Lend:

While congressional leaders this week excoriated the leaders of banks that have received billions of dollars in government bailout money for not doing enough to end the credit crisis, it may actually be consumer fear of borrowing that’s blunting banks’ efforts to lend.

Chief executives of eight big U.S. banks that have received the taxpayer-provided rescue money were in Washington this week to testify before Congress told U.S. lawmakers that their institutions have lent out more than $400 billion. Skeptical congressional leaders excoriated the executives for not doing enough to end the credit freeze that’s blunting consumer confidence and threatening to plunge the U.S. economy into an even deeper recession.

But the U.S. consumer may now be the real culprit. Banks want to make loans. The problem is that fear-frozen consumers just aren’t biting, said Curtis Hage, CEO of closely held Home Federal Bank of Sioux Falls, S.D., which received $25 million worth of federal bailout money via the Troubled Assets Relief Program.

If there was a greater demand out there for loans, we’d be out there after them like a dog after a bone,” said Hage.

The upshot: Big banks are under the congressional microscope, even though the appetite for loans among many typical American consumers seems to have dried up.  Small bankers around the country are finding that, for now, many customers are sitting tight.

Congressional leaders didn’t want to hear that as they grilled the CEOs of big U.S. banks earlier this week.

“There is a great deal of anger about the financial institutions here,” House Financial Services Committee Chairman Barney Frank, D-Mass, told the CEOs. “There is anger about us, and there is anger about the executive branch. If you want to give the money back, we’ll take it.”

TARP was designed to thaw frozen credit markets, then-Treasury Secretary Henry Paulson told Congress on Nov. 24. But lending nationwide actually slowed after the Treasury Department began giving 389 banks $236 billion in TARP money on Oct. 28.

Outstanding loans and credits at commercial banks fell to $7.057 trillion in the week ending Jan. 28 from $7.266 trillion in October, according to the Federal Reserve.
The CEO’s of the big banks that received the first allocation of $125 billion of TARP funds were put on the hot seat yesterday (Thursday) as Congress demanded to know exactly what they had done with the government money, MarketWatch reported.

But they defended their actions, saying they had actually increased lending, largely because of funds they had received from the bailout program. In fact, two bank chiefs said they lent out even more money than they received from TARP.

We are actively putting our capital to work,” said Goldman Sachs (GS) CEO Lloyd C. Blankfein.

  • Wells Fargo & Co. (WFC) CEO John G. Stumpf said that his bank made $72 billion in new loans in the fourth quarter, adding that the loans were almost three times what the bank received in bailout funds.
  • Bank of America Corp. (BAC) CEO Kenneth D. Lewis said the bank lent roughly $127 billion in the fourth quarter. More than half that money was doled out to commercial real estate and businesses.
  • Citigroup Inc. (C) CEO Vikram S. Pandit said that the bank provided more than $75 billion in new loans to consumers and businesses in the fourth quarter.

But some question whether enough lending is taking place. Based on a 1 to 10 lending ratio, critics argue that these banks should be lending $1.3 trillion based on the $125 billion allocated to them.

House members reiterated their concerns about how banks are using the government money and raised questions about whether banks have been using the capital injections for making acquisitions instead of lending.

In fact, Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended.  As our ongoing investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyouts deals are being done in markets as far away as China, even as banks outright refused to discuss the matter.

For its part, the Obama administration will mandate that any TARP funds it releases to banks will be directed specifically for lending, Treasury Secretary Timothy Geithner said on Tuesday  (Feb. 10).

But by essentially targeting Wall Street banks, Congress may be missing out on what’s really happening – or not happening – out on Main Street.

C.R. “Rusty” Cloutier of MidSouth Bank in Lafayette, La., wants to do his part for the economy by lending locally for cars, homes, and small businesses – if only he could get his customers to cooperate.

After his bank received a $20 million cash infusion from TARP on Jan. 9 he went on the road to 14 “town hall” meetings, hoping to entice borrowing by consumers in its business market.

What we want to do is make people aware we have $250 million to lend,” Cloutier said.  But, at one meeting, the 20 or so customers in the audience were outnumbered by bank employees handing out cookies and bottled water. Not one person asked for an application.

While he has attracted a few fresh borrowers, people are “very, very nervous” about taking on significant new debt, the 61-year-old banker said. “Credit hasn’t tightened, but the ability to find creditworthy borrowers has tightened.”

Some MidSouth officials wonder if the bank did the right thing in accepting TARP assistance, said Will G. Charbonnet Sr., MidSouth’s chairman.

The $20 million was in exchange for 20,000 preferred MidSouth shares, which the Treasury Department bought for $1,000 each, according to the bank. MidSouth pays a 5% annual dividend. In addition, the Treasury received 208,768 warrants for common shares, according to Bloomberg.

I wrote about this a while ago in Where Has All the Money Gone. A few more people seem to be understanding it now. Count out Congress, whose members are ranting and shouting day in and day out about the lack of credit, tightness of credit, and stingy banks.

People are sick and tired of borrowing, spending, and debt. They want to save up money and/or consolidate debt which they have failed to do for the longest time.

Most of these banks are now sitting on liabilities that pay out a fixed 5% annually without being able to pass the money on at a premium. Expect them to either buy back those shares (if they can) or at least not to accept any more government money from hereon out.

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