Why aren't banks lending? A different answer...

As we continue to try to sort through the ruin of the global financial crisis, I've been consistently amazed at the widely contradictory treatment that banks throughout our nation have received. We love the banks, we hate the banks, we need the banks, the banks are leeches, TARP, FinReg, here's some money, why aren't you lending, ad nauseum.

America (and Washington) is clearly conflicted as to the role of banks in rebuilding our economy. They know that banks played an integral role in creating the panic of 2007-2009, and they thus seem to feel a moral need to punish them. At the same time, they know that economic growth like we experienced over the last 20 years is impossible without these same banks providing loans to individuals and small businesses.

After having received billions in taxpayer funds through the TARP program, and with trillions of dollars of cash showing on their balance sheets, banks continue to face heavy scrutiny over their lending practices. Debate rages as to why banks aren't lending. A more fundamental reason? They are.

Ben Bernanke, Chairman of the Federal Reserve—essentially did the ol’ switcheroo on the Toxic Assets [mortgage-backed securities]: In order to save the banks whose balance sheets depended so heavily on these now-dead turds, the Fed purchased the Toxic Assets at their nominal price. Then the banks—the so-called Too Big To Fail banks—took that cash and purchased U.S. Treasury bonds

...

Meanwhile, the U.S. Treasury, in its attempts to finance bailouts, stimulus, health care, Social Security, and endless pointless wars, went into further debt—to the tune of $1.4 trillion dollars, roughly 10% of U.S. gross domestic product, for both 2009 and 2010.

Let's back through this. The government expanded its debt to bail out the banks and provide further economic stimulus--so much debt, in fact, that 25 cents of every tax dollar collected finances THE INTEREST on that debt. That comes despite the fact that interest rates across the yield curve are at historic lows. Why are rates so low? Because the banks are lending to the federal government, by buying treasury bills.

Realistically, the "cash" that many insist is on bank balance sheets isn't really cash. Look closely at a bank's balance sheet, and you'll see that the line item for "Cash" actually reads "Cash and Equivalents". Treasury bills, and other "short-term" investments, can be classified as "cash" for accounting purposes. With banks buying up every treasury bill in sight and driving rates lower, they are able to show cash on their balance sheet even while they are realistically making loans. Everybody wins.

The uncomfortable truth is, if large banks were to stop piling their "cash" into treasury bills, and to lend that money to individuals and small businesses instead, treasury yields would skyrocket, the portion of tax dollars that go toward paying the interest would increase from its current level of 25% to 50% or 60%, and the federal government would become literally insolvent (not "bankrupt"--insolvency is the condition, bankruptcy is the solution to the condition, but I digress). Insolvency of the federal government is clearly bad, bad news for everyone. So it's in everyone's best interest for the banks to lend to the government, and nobody else. Our government, and we the taxpayers by extension, cannot afford to see an increase in its interest rate.

The federal government cannot, of course, admit this truth--to do so would be political suicide. They know that they need the large banks in order to remain solvent, and they recognize that this is the real reason the banks were bailed out in the first place. As long as our government continues to add on to our national debt, banks will not and cannot lend elsewhere, and the widely contradictory treatment that those banks receive will continue.

[Zero Hedge]