Why the banks should be hoarding their TARP money, Part II

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A couple weeks back, Justin liked Jack Guttentag’s explanation of why banks receiving TARP money shouldn’t be made to immediately lend it out. This morning I am equally impressed with Bert Ely’s opinion piece in the WSJ about why pressuring banks to lend could backfire. Among the points that bear repeating:

Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). “Shadow banking” — notably asset securitization and money-market mutual funds — now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance.

As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession.

Also this:

The drop in stock-market and house prices has made millions of families feel poorer and led them to save more than in recent years. It has also encouraged them (especially Baby Boomers approaching retirement) to pay off debt. They don’t need more debt.

More broadly, many of the most creditworthy neither need to nor want to borrow right now. Richard Davis, CEO of U.S. Bancorp, recently said that he is seeing the demand for loans diminish at his and other banks “from people and businesses spending less and traveling less and watching their nickels and dimes.”

Lenders moreover have tightened lending standards, correcting an excessive laxness that contributed to our financial mess… And contrary to the “lend more” message broadcast from inside the Washington Beltway, bank examiners are criticizing weak loans and forcing banks to tighten lending standards. Bankers are caught in a vise between politicians and examiners.

On principle alone, in a head-to-head between politicians and bank examiners, I’m going to hope the examiners win.