Granting credit is a work for “Credit Institutions”, isn’t it?
Let’s try to operate an alienation exercise and let’s discover what happens.
The first – and heavy, I know – step to be taken is to put yourself into a banks’ shoes. Which is the current scenario? That’s because it’s undoubtedly true, banks grant credit, but each individual works for a remuneration. The first step is then to ask yourself: which would be a reasonable rate for lending money?
I don’t want to bore you, so I’ll try to make the concept clear with reasonable simplifications (I beg your pardon, purists: it’s a didactic purpose): the rate for lending 100€ will be equal to A+B+C where:
A is the cost of money
B is the hedging
C is the margin for the bank
the rise in the spreads connected to Italy, boosted from the beginning of the summer 2011, triggered a remarkable increase of A. Credit starts to become expensive and selective, creating problems in paying: little and weak companies cannot withhold the pressure without the credit given by their earnings (being them absent of strongly delayed) and will miss some payments in turn. This process results into a 12% of doubtful, non performing debt: so if a bank lends 100€, it is given back 88€ + interests.
Just to give you a hint, during the very hard 2009 – all-time low of the markets, aftermath of Lehman – the rate of doubtful debt was a little higher than 3%.
then, even with a sudden and energetic intervention on A, the ECB LTRO can’t reactivate the credit cycle because the rate of doubtful debt was able to pump B up.
So if you can walk into bank’s shoes for a while, try to imagine that you’ve decided to work on a 0 (zero) margin for a while, and thanking the ECB which grants access to money at 1% rate, which would be a rate for financing the enterprises in order to make those 88€+interests more interesting than other way to use that money, giving the 100€ lent?
For sure, financing subjects able to offer real guarantees allow a compression of B, which results into the bank being named for its attitude of lending money only to entities with money, or to lend money with rates comparable to those of loan sharks.
And then, with the earnings from trading, wouldn’t be possible for the banks to compensate their credit losses? Well…I’ve discovered that my greengrocer has found a new supplier for bananas which allows him to earn more. And when I’ve asked him to sell me oranges below cost and to compensate the loss with the increased earnings on bananas…duh, I won’t tell you what he said me.
But how we’ve come to this situation?
In respect of the Smith theory of the Invisible Hand, we’ve accepted the postulate according to which the general interest is just the sum of individual interests. That historical moment was the one of banks seen as the transmission belt of the system, not its engine (to use a metaphor proposed by first emin in a comment to my previous post). We’ve asked the banks to be efficient, competitive, we’ve asked them to create value. And it’s hypocrite and/or naïve to ask why banks are not performing their duty of financing the real economy.
After the privatization phase of the BINs (Banks of National Interest) the change in the economic context made the banks become the engine – no longer the transmission belt – and from that moment on we’ve been falling into a bank-centric world, a “financialized” world.
There may be individuals egoistically seeking their interests, and there may be individuals who are vital to the system – it’s their coexistence of the two in a single category of subjects which seems to be failing, to all appearances.