The Banks' Chicken And Egg Problem, Cont'd.

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THE STASH APRIL 16, 2009

The Banks' Chicken And Egg Problem, Cont'd.

Another point to Judis in our continuing debate over whether loans drive growth, or growth drives loans. From today's Journal:

Dan Carl, who owns a handful of businesses including several car dealerships in Michigan, said Fifth Third Bancorp, Cincinnati, refused to renew some of his company's credit lines when they came due earlier this month. On other loans, Fifth Third raised interest rates and demanded Mr. Carl's firm put up additional collateral.

The lack of affordable credit was one factor prompting Mr. Carl's company to recently lay off 20% of the work force and close at least one dealership. ...

Fifth Third received $3.45 billion through TARP.

It made $634 million of new commercial and industrial loans in February, down from $785 million in January and $1.3 billion in December, according to the bank's filing with the Treasury Department. ...

Fifth Third spokeswoman Stephanie Honan said the bank won't comment on specific customers.

In reviewing loans, she said, Fifth Third considers overall economic conditions and "any changes to the customer's business environment." [emphasis added].

As I said last time, it's not like there's an alternative here: While the banks aren't exactly expanding credit, they'd be massively contracting it without TARP, which would be an economic disaster. The lesson is that you have to stimulate the demand-side of the economy at the same time you stabilize the banks. Just doing one without the other doesn't seem to get you much.

--Noam Scheiber

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