July 2011 | By Lawrence Yun
You already know from real-world experience that banks are not lending. But now your experience is backed by hard data from the FDIC. The agency found that in the year ending March 2011, bank deposits rose by $300 billion, assets grew by $80 billion, and profits were up by $12 billion. Yet loan volumes fell $260 billion to $7.24 trillion.
The banking industry's old "3-6-3 rule" says that bankers pay 3 percent interest to depositors, make loans to depositors at 6 percent, and be out on the golf course by 3 p.m. That rule now seems to be replaced with a new 0-0-3 rule: Offer nothing to depositors and nothing to those who want to borrow, and earn 3 percent by buying tradable assets like government bonds.
To be sure, profit is not a bad thing. But when banks accumulate profit at the expense of doing what they're in business to do—make loans—they put brakes on the economy.
We might already be seeing the consequences of that, with the economic recovery showing signs of sputtering. So it's of little surprise that pending home sales in April took a tumble, falling 11 percent. Rising gas prices and unusually wet weather contributed to the slowdown. Whether home sales in the months ahead will also fall, we'll have to wait and see. But if these overly tight lending conditions worsen, then a price decline in the double-digit range is clearly possible. Strategic defaults and foreclosures will rise, and bank balance sheets will deteriorate. A second recession is possible.
But this is a worst-case scenario. What's more likely is that any additional price contractions will be modest. Home values have already fallen considerably, to historically justifiable levels. And in areas where jobs are strong, prices are solid or heading up.
But the lesson is clear: A return to banking the old-fashioned way can speed the housing recovery.
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