Wednesday, July 22, 2009

When You Don't Need It

Good ol' Helicopter Ben Bernanke is sitting in front of the Senate Banking Committee and spinning his usual bullshit.

But I want to focus on one thing that's been consistent throughout this whole debacle - the constant pressure for banks to lend to "creditworthy" customers.

What's the old saying? Banks only lend you money if you can prove you don't need them to.

The people who have good credit are those who have shown that they have the ability to spend within their means. Mortgages used to only go to people who could show that they'd EVENTUALLY have the money for the house anyway - after all, that's what you're doing with a mortgage, slowly buying your house - but only had a percentage of that money on hand. Same with business loans - you've proven that your business can pay off the loan, and if you'd just save the money now, you could eventually pay for it yourself.

But loans exist because of time. Sure, a business owner could put $1000 a month in the bank for 5 years and have $60,000 to renovate or expand the business. But in 5 years, that $60k won't buy as much, and it's 5 years of the business getting by without the changes. So the owner goes to the bank, shows that he has an extra $1000 a month, and the bank exchanges him $60k for that $1000 every month. This way, the owner can make the changes now, reap the rewards, and he eventually has paid off that $60k, plus some interest, which is for the convenience of having the money now.

That all changed during the credit bubble.

Rates got so low, that the interest became inconsequential. Banks weren't going to earn much on the loans, so they needed to make more of them. They loosened the standards because the collateral being used - largely real estate - was going up, up, up in value.

And then it collapsed, and everybody who should never have seen a loan in the first place defaulted on them.

The banks tightened the purse strings, and were responsible again for the first time in nearly a decade. They're getting berated for being financially sound in their decisions now, because the world has become so used to living on borrowed money that they can't remember fundamental economics - if you don't have the money, don't buy it.

And now the pressure is being reapplied - lend to the creditworthy! It used to just be "lend!" now they've added a qualifier so as to not piss people off. The problem is this: The creditworthy are too smart to borrow money.

They've saved. They've taken note of what they can and can't afford. They look at investments and determine what is actually a value play instead of just a dream and crying call of a purchase in hopes of positive return. And they're patient.

The business owners who have solid credit scores are biding their time. The addition on the building can wait. The expansion plans aren't necessary right now when business has dropped. The upgraded equipment will still be available in six months. The money can be saved with minimal concern at this point, because it's better to have a cushion of cash than a black hole of debt. Those that DO want loans will shop around for the best rate, and they'll minimize that loan by finding opportunities that offer the best value. If they need $20,000, they'll ask for $20,000. They won't take the $100,000 they'll be offered, because they don't need it.

The point being - you can't lend to customers that don't exist. The pool of borrowers has dried up to a puddle, and the fish aren't jumping. Turning up the heat on the banks to lend to the creditworthy at this point means redefining "creditworthy", and that's what go us into this mess in the first place.

No comments: