The Economy’s Vicious Cycle for Michigan Banks and Business
The video below from the Wall Street Journal gets at the heart of why the bailouts have been so toxic for the economy. Banks, still laden with existing bad loans to small businesses, are unwilling to make new ones. Businesses, unable to receive credit, cannot expand or must downsize. This in turn puts a squeeze on consumers who underpin 70% of economic output.
If the bad loans were written down right now and the debts recognized, even more banks would be declared insolvent, further weakening credit conditions. However, a Swedish-style solution could avoid this outcome.
This sobering portrait comes from Michigan, one of the hardest hit areas of the American economy. Listen to stories by real business managers and bankers there.
The Wall Street Journal has an accompanying front page story on the Michigan video called “Loan Squeeze Thwarts Small-Business Revival.”
Also see "Bank failures in Georgia crushing small business and home owners," which is a more mortgage-related take on the same theme in Georgia, the state in the U.S. with the highest number of banking insolvencies in this crisis.
Update: Barry Ritholtz disagrees that it is credit availability that is at issue. He points to the demand for credit. Fair enough – demand for credit is the critical factor nationwide. However, supply side issues are also there. Availability of credit is key for those smaller businesses that actually do want to expand because they are being denied in a way that they were not as reported by the Fed’s survey of credit officers.
Edward,
I’d like your thoughts on my response, as well as Marshall’s.
Since you highlighted the credit squeeze in Michigan, I’d like your thoughts about state-owned banks and this article.
I’m having a hard time seeing how state owned banks could do a LOT worse than Citigroup or Goldman.
https://www.truthout.org/the-growing-movement-publicly-owned-banks57812
Barry Schaeffer
Barry,
I’d like to defer to Marshall because I have a hard time with this for purely ideological reasons. I would prefer less government. And I also know that in Spain and Germany the cajas and Landesbanken (state-owned banks) were responsible for most of the carnage. So, I don’t see this as a promising solution in all cases.
Better is the mutualized bank as we see in the UK. Mutualized Building societies there have done better than their public company counterparts. The Halifax is a perfect example of a bank that took on LESS risk as a mutual organization.
USAA is a great example of this in the US