Where has all the bank lending gone?

Despite massive infusions of government aid, the big banks are lending less and less each month.

Published April 21, 2009 3:09PM (EDT)

Banks are lending less since they first received TARP funds in October, reported the Wall Street Journal in a much-talked-about story on Monday. Even worse, according to the Journal's calculations, they are lending less than the Treasury Department claims they are lending.

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23 percent less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program...

The Journal's analysis paints a starker picture of the lending environment than the monthly snapshots released by the government and is a reminder of the severity of the credit contraction. One reason for the disparity: The Treasury crunches the data in a way that some experts say understates the lending decline.

Two points:

1) The Journal was working with data supplied by the Treasury, and the discrepancy results from the Treasury's decision to report the median decline in bank lending while the Journal "focused on the total amount of new loans by the 21 banks," which it called "a more comprehensive measure." So Treasury says that lending declined by 2.2 percent in February, compared to January, while the Journal's number for the same period is a 4.7 percent drop.

The Treasury's conclusion that lending has dropped only modestly is partly the result of its focus on the median monthly change at the top banks, rather than the change in average or total lending.

I have no formal training in statistics, so perhaps some of my more knowledgeable readers can enlighten me. I was under the impression that working with median numbers is often considered preferable to working with averages, since averages can be skewed by outliers. Is that wrong in this case?

2) The context for reporting these numbers is the perceived backlash against the Obama administration that a sharp lending decline would precipitate.

Political disquiet over banks' perceived lack of lending, as well as their spending on bonuses and perks, has provoked skepticism about the administration's ability to revitalize the banking system. Any evidence that banks are lending less could reinforce criticism of the program, and put pressure on plans crafted by Treasury to unfreeze credit markets and support bank balance sheets.

Here is where the Obama administration is really stuck. Treasury Secretary Geithner has been extremely consistent, dating back at least as far as his Senate confirmation hearing, in noting that the purpose of the various bank assistance programs is not to raise the amount of bank lending back to "normal" but to ensure that there is more lending occurring than there would otherwise be without any bailouts. But since there is no way for us to know how little the banks would be lending if they had been left to totally fend for themselves, it is very difficult to evaluate if the Treasury's efforts have been successful. All we know for sure is that the banks are lending less, despite massive bailouts. One can argue that a decline in lending activity is a pretty natural reflection of an economy in a sharp contraction, but it still doesn't look good.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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