From: mccall@mksol.dseg.ti.com (fred j mccall 575-3539)
Subject: Re: The blame game
Organization: Texas Instruments Inc
Distribution: usa
Date: Tue, 15 Sep 1992 17:04:01 GMT

In <21529@rpp386.lonestar.org> jfh@rpp386.lonestar.org (John F. Haugh II) writes:

>In article <1992Sep14.124914.4691@mksol.dseg.ti.com> mccall@mksol.dseg.ti.com (fred j mccall 575-3539) writes:
>>                                          Banks aren't failing to lend
>>the money through choice; the credit markets are just that soft on the
>>demand side right now.

>Actually, banks aren't lending the money because they don't want to
>get whacked by the government if they screw up.  If you'd invest some
>of your money in the stock market you'd know that housing stocks are
>low right now because the banks aren't floating interim financing in
>enough quantities to keep new construction underway.  We've had
>several houses on this street (which is less than a year old) stop
>suddenly because the next phase of interim credit fell through.  This
>is happening all across the country.  It isn't limited to Texas.

Yes, but why are the banks seeing those kind of loans as risky?
Because demand for new housing (by people who can afford to get and
service the loan to buy it) is small due to economic uncertainty.
Hence demand for credit is reduced at that point.  Because of low
interest rates and their current portfolios of bad debt, banks are
having to avoid the more speculative loans (which housing falls into
right now).  Banks need to loan money at high enough rates to enable
them to continue to service their portfolios of bad loans and pretend
they are good and they need to avoid any more bad loans.  Hence
interest rates are held higher than they should be by the banks, and
qualifying is harder than ever unless they see a very good chance of
being able to recover.  Fear of the government regulators might have
something to do with it, but not as much as you might think (except
for the fact that they know that regulators have decided to hit early
rather than let them dig a MAJOR pit first, as they have in the past). 

>This is just a theory (meaning I really have 0 evidence and am certain
>to be taken out of context ...), but I believe that consumers are
>paying off the debts because banks won't lend them any more money.  

This is part of it, but I think you overlook the quite real motivation
to pay off debts and not borrow more due to basic uncertainty.  If I'm
concerned about whether I'm going to have a job next week, I will put
off major purchases.

>I
>have another theory as to why which says that banks don't want to
>make loans at these very low rates because the fear interest will rise
>again and they will be stuck with real low paying loans for a real
>long time.  

But they could still go with adjustable-rate loans -- however, the
rates for those are unrealistically high, too.  There is almost
certainly something to what you say, though.  Given their current
portfolios of bad debt (which they are pretending is good debt to keep
the asset side of the balance sheet in order), they need a certain
amount of cash flow to service all that from any future loans they
make.  Low interest loans simply don't do that for them.  In addition,
the Feds have developed a real bad habit of coming in and forcing
banks to write off some of that bad debt -- which, for a lot of banks,
puts them into insolvency (they were insolvent all along; they were
just treading water by pretending those debts were good and keeping up
with the payments on everything else).

-- 
"Insisting on perfect safety is for people who don't have the balls to live
 in the real world."   -- Mary Shafer, NASA Ames Dryden
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Fred.McCall@dseg.ti.com - I don't speak for others and they don't speak for me.