Why Are Loans Still Hard To Get?

Bank executives told members of the House Financial Services Committee that lending has increased since the government's $165 million cash infusion. One executive says his bank is lending to consumers but other parts of the financial system have tightened credit. David Wessel of The Wall Street Journal talks with Renee Montagne about the credit crisis.

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RENEE MONTAGNE, Host:

To find out if banks are getting their bailout money to ordinary folks on Main Street, we're joined now by David Wessel. He is the economics editor of the Wall Street Journal and a regular guest on our program. Good morning, David.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: How do you assess the debate that we just heard. The bank CEOs say their banks made hundreds of billions in loans in the last quarter. Is that really as much as it sounds like?

WESSEL: Well, billions and billions is a lot of money, there's no doubt about that. It's really a compared to what question. Compared to what the economy needs to get growing again, it's not enough. We know, because the banks tell the Federal Reserve this, that nearly every bank is making it harder for people to get loans. They're raising their standards.

But the Obama administration is saying that's not the right test. They say the test is, compared to the loans that the banks would've made had they not received the government money. And by that measure, the bankers argue and so does the administration, the money is actually doing some good.

MONTAGNE: Now, we just heard Jamie Dimon, the head of JPMorgan Chase, putting the blame on other parts of the financial system. Saying that it's car finance companies, mortgage companies, those that have tightened credit. Is that the main problem now?

WESSEL: I don't know whether it's the main problem. It's always attractive to blame somebody else when there's a shortfall in the system. But that is a huge problem. And, in fact, one big piece of Treasury Secretary Tim Geithner's plan is to work with the Federal Reserve to put up to $1 trillion into these markets where loans are made not by banks, but they're made by essentially retail outlets that make loans and then the loans are sold as securities to investors.

And that's been very important. Geithner said it was 40 percent of all consumer lending - auto loans, student loans, small business loans. And that market isn't working, so Dimon has a point.

MONTAGNE: Can the government force financial institutions to make loans? And I guess the extra question to that is, should it? It seems like our current problems stem from too much easy credit.

WESSEL: Well, that's right. The government cannot force the banks to do anything unless it chooses to basically take over the banks and run them like it runs the agriculture department. And as you know, there are some people who think they ought to do that.

In the meantime, what they're doing is they're saying we want to make sure that you aren't unable to lend because you don't have enough capital. They're going to put a lot of pressure - and the hearing yesterday was an example of what kind of pressure they can put on the banks to lend - but there is also an argument that you don't want the banks to make more bad loans.

So, there's this tough balance that the government is trying to strike - lend more to people who can pay it back. We know the economy is weak, so don't lend more to people who you don't think are good for the money.

MONTAGNE: David, let's turn for a moment to a key personality at the center of all this: Treasury Secretary Geithner. He was also up on Capitol Hill yesterday. The stock market took a dive after his first presentation on Tuesday. Was he more convincing yesterday?

WESSEL: Well, the stock market didn't fall again, so I suppose that's one measure. The problem here is that Mr. Geithner gave a speech that if you read it was pretty clear and laid out what he called a framework. But clearly people want to know more than just what the framework is. They want the details. They want to know how is this public/private partnership to buy assets going to work? How is the foreclosure avoidance program going to work? Who's going to get capital and who's not going to get capital?

And until he provides those details he's likely to meet with an incredible amount of skepticism, not only from the markets but from politicians and from the press.

MONTAGNE: Well, again, you know, he spoke again, as you said. The stock market didn't fall on his latest words. But about those details - how likely is he to lay out more details and how soon?

WESSEL: I think some of this was a problem that they created. They allowed the expectation to be created that there was going to be more detail and that the program might be more generous to the banks than it now looks to be. And so it'll take a while for them to put the pieces together.

I went to one of the briefings after Mr. Geithner's speech and it was clear that this was very much a work in progress. They're under a lot of pressure to come up with details, and I expect that they'll do it one piece of this at a time, especially the working to come up with some plan to spend the $50 billion that he promises will be used to help people stay in their houses and avoid foreclosure.

The pressure to do that from Congress and from the public is so enormous that I expect we'll see details on that quite soon.

MONTAGNE: David, thank you as always.

WESSEL: A pleasure.

MONTAGNE: David Wessel is the economics editor for the Wall Street Journal.

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MONTAGNE: This is MORNING EDITION from NPR News.

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