Bankers damned if they do, damned if they don't
Comment
Ian McGugan, Financial Post
Spare a moment this holiday season to pity "fat-cat bankers."
After pinning the disparaging label on Wall Street in a weekend interview, Barack Obama, the U.S. President, devoted part of Monday to lecturing a dozen of the fat cats on the need to open their wallets and lend, lend, lend to get the economy moving again.
U.S. bankers now have their marching orders. They're supposed to fight a recession caused by lax lending with even more lax lending.
If that sounds odd to you, join the club. Bankers seem to be risking scorn no matter what they do. Lend money to anyone who asks? You're a villain preying on gullible consumers. Lend money only to the best credit risks? You're a greedy no-good who is delaying the economic recovery.
The conflicting signals aren't just a U.S. phenomenon. Closer to home, the Bank of Canada has been expressing a viewpoint toward lending that is nearly the opposite of the U.S. attitude.
In its recent review of the financial system, the central bank said that rising levels of household debt are increasing the possibility of defaults. While Obama is encouraging banks to lend, the Bank of Canada is warning Canadian households of the dangers of borrowing.
It's not at all clear what a bank in either country is supposed to do in this environment - lend liberally to give the economy a boost or sit on its cash to prevent losses.
The level of household debt to income is higher in the United States than in Canada, yet U.S. banks are being scourged for being too tight with their lending policies, while Canadian banks are being implicitly cautioned for being too loose.
David Rosenberg, chief economist at Gluskin Sheff and Associates Inc., a Toronto money manager, is furious at the way in which he believes U.S. politicians and the U.S. media are scapegoating their banks. "This backlash against the banks, whose behavior was condoned by the government when the credit and housing bubble was in full swing, is surreal," he writes in a research report.
Rosenberg rips into the media for "running articles that complain about the lack of credit being extended by the evil banks, even though it was excess debt taken on by a profligate consumer that got us into this mess to begin with."
As he points out, U.S. banks were slammed a year ago for lending too much when times are good. Now they're being told that the solution is to go back to reckless lending. "We have news for the President," Rosenberg concludes. "Being public companies, the lenders' fiduciary responsibility, first and foremost, is to their shareholders, not deadbeat debtors."
You can take issue with Rosenberg's sense of fairness - aren't many of those deadbeat U.S. debtors paying taxes to support the bailout of the banks? - but he does pinpoint one of the core problems in resuscitating the U.S. economy.
A U.S. banker who puts his shareholders first is going to be wary of lending money at a time like this, when the economy is reeling from 10% unemployment and excess manufacturing capacity abounds. But until lending resumes, the U.S. economy will stutter.
Monday's meeting of Obama and top U.S. bankers, including Jamie Dimon of JPMorgan Chase & Co., John Stumpf of Wells Fargo & Co. and Ken Lewis of Bank of America Corp., did not result in any immediate action, other than bland statements in favour of regulatory reform.
Meanwhile, many forms of credit continue to contract in the U.S. economy. Business lending fell to US$1.35-trillion this month from US$1.65-trillion in October 2008. Consumer credit tumbled at an annual rate of 3.25% in the third quarter.
Meredith Whitney, the U.S. banking analyst who warned of the current crisis, estimates that U.S. banks have cut US$1.5-trillion from credit-card lines. She predicts millions of U.S. consumers will effectively be kicked out of the financial system in 2010 as credit dries up.
But while U.S. consumers are facing a credit drought, Canadian consumers are swimming in the stuff. The Bank of Canada reports that consumer debt grew at an annual rate of 8.2% in the third quarter, while mortgage debt expanded 7.7%.
As U.S. credit contracts and Canadian credit expands, the traditional image of Canada as a nation of cautious savers is taking a beating. Statistics Canada reported Monday our ratio of household debt to disposable income now stands at 1.45 - not much below the 1.6 level in the United States. Another year could close the gap.
If the day comes when Canadian and U.S consumers are equally indebted, U.S. politicians will no doubt attack banks for lending too little, while Canadian regulators will probably criticize our financial sector for lending too much. The one thing you can count on is that public perception in both countries will put the fat cats in the wrong.
