The real slowdown is in expectations

Bloomberg ran this article about Midsouth Bank.  They took down a 20 mil infusion from the government, then tried to actively market 250 mil in loans.  They couldn’t drum up any business.

What is different about this economic downturn is the abject caution, the inverse behavior of the prior couple of decades:

MidSouth, which has $937 million in assets and 34 branches in southern Louisiana and southeast Texas, is struggling to put its TARP money to work, Cloutier said.

While he has some fresh borrowers, people are “very, very nervous” about taking on significant new debt, the 61-year-old banker said.

Right.  With such low visibility, and so many talking heads telling people how deep the problems are, its very hard to get a clear picture of potential return on investment.  Taking on a lot of debt right now certainly would seem to be the opposite of what most people are trying to do.

“Credit hasn’t tightened, but the ability to find creditworthy borrowers has tightened,” he said.

Most of the loan demand out there is from the overleveraged who need to refinance.  Don’t forget, banks are affected by that same unclear return on investment that business owners are.  They have to err on the side of caution.  A lot of the federal money has come with onerous coupons attached.  In order to cover the spread between the dividend payments due to the government and the rates charged to borrowers, banks probably lose money on loans here.  If you’re paying the government 8% to borrow money, why would you want to write mortgages at 4.5% with that money?

This is why manipulating rates ultimately doesn’t work.  The Fed has pushed rates down while risk has gone up substantially.  Risk should mean higher rates, not lower ones, you idiots.  Banks can’t possibly turn a profit on new business with this spread and it’s unclear what would alleviate this massive pressure on their models.  Ultimately, the government probably has to forgive these coupons to restart lending.  In the meantime, dear taxpayer… take heart.  At least they’re not making new bad loans.