Are Big Banks Hoarding TARP Funds?

Finding shoddy analysis online is like shooting fish in a barrel.

In an article entitled, "Big Banks Hoarding TARP Funds: Why Not Just Nationalize Them?" two of the dimmer bulbs on Yahoo Finance shriek about banks getting TARP government funds "hoarding" rather than lending the money.

They cite a recent Wall Street Journal (WSJ) article and analysis to support their case. However, in reading the WSJ piece, here is the key passage:

"Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results."


So, lending declined by just 1.4% in the fourth quarter and so these columnists leap to the conclusion that banks are hoarding the money they got from the government!

The WSJ piece didn't use the word hoarding but it did include this passage:
 
"The overall decline in loans on the 13 banks' books -- from about $3.36 trillion as of Sept. 30 to $3.31 trillion at year's end -- raises fresh questions about TARP's effectiveness at coaxing banks to reopen their lending spigots."


And, the article includes the following statement/opinion from Duke School of Business finance professor Campbell Harvey in reference to the government TARP loans, "It has failed. Basically we have dropped a huge amount of money...and we have nothing to show for what we actually wanted to happen."

Now, it's important to remember that all signs point to the fact that the economy contracted by a fair amount in the fourth quarter and we've been told that we're officially in a recession. More than one million jobs were shed during that time and most economists expect that period's GDP numbers to be down by about a 5% annualized rate.

In recessions, unemployment goes up and GDP goes down along with the level of business activity. Thus, borrowing tends to go down too. You can clearly see that in the following graph which looks at yearly changes in lending at commercial banks. In past recessions, you can see that business lending declined are far faster rates than we have seen thus far in this recession. 





The fact that lending only declined by 1.4% in the fourth quarter of 2008 strikes me as pretty amazing given "how bad" the economy has been. So, I asked professor Harvey about this and he told me, "Lending should be going up...the Federal Reserve has been creating lots of money and the government has injected several hundred billion in TARP money."

Yes, that's true but as the above graph shows, expecting lending to increase in a recession is ludicrous. And, how about some patience here - these banks got these capital injections in November and December. We all know how business activity slows down around the holidays. And, since we the taxpayers are now stakeholders in these banks, the last thing we want them to do is to rush to make loans that aren't going to get paid back. They've got enough of those already - that's how we got into this mess!