John Connaughton, an economic forecaster at UNC Charlotte, says that for the good of the nation, it's time to cut bankers some slack.
Bankers have become a populist piñata, vilified for their bonuses, but Connaughton warns that the public and politicians will have to give up banker-bashing if they want an economic recovery. The economics professor says that a prevailing atmosphere of hostility is making it difficult for banks to start lending again, which means the national economy is being deprived of the fuel it needs to run.
Connaughton will be one of the featured speakers at the eighth annual Economic Forecast Forum on Monday in Raleigh. Connaughton's message is sure to be warmly received by the conference sponsors: the N.C. Bankers Association and the N.C. Chamber.
He spoke with staff writer John Murawski about the role banks plan in the nation's economy, and how that essential function has been short-circuited during the recession.
Q: President Obama recently chided the banks and urged them to start lending money again. How do we know banks are being overly cautious and risk-averse?
It really has to do with their willingness to lend. The best real hard evidence that we have of this problem is this excess reserve number. Normally banks like to hold as few excess reserves as possible. If they hold it idle in the form of cash, then this is something that doesn't earn them any money.
Prior to this event in early to mid-2008, the entire banking system was holding somewhere in the neighborhood of $1.5 billion to $1.75 billion in excess reserves. After the catastrophe in the fall of 2008, we saw that number rise dramatically from less than $2 billion to, within four months, to $800 billion. That's over a 400-fold increase in the amount of cash that banks are holding onto.
We saw that number in 2009 start to come down into the $600 billion range, and we started to get optimistic that banks had gone through the process, made sure they had cash and were starting to feel a little bit less threatened by the economic situation. And then, shortly after the "stress test" was announced in late winter of 2009, we saw that number shoot up again, and it's been climbing fairly steadily since then and is now over $1 trillion.
Q: Why are banks hoarding all this cash?
They needed to hold cash in order to protect themselves against possible default on the part of these assets they were holding.
Banks are hoarding cash right now because they do not feel like the old rules apply anymore. If they wind up being in a situation where they have a run of sorts and they became illiquid, they cannot count on the Federal Reserve lending them money. If the Fed did lend them money they would catch so much grief politically for getting themselves in that position again.
Q: We've been hearing for months that the financial sector acted recklessly with other people's money. So why should the banks be lending again and racking up more debt during uncertain economic times?
Obviously the economy has turned around. Everything is in place for a recovery. The one incredible missing ingredient is financing.
If small business can't borrow in traditional ways, then the potential of job growth in small business is essentially zero. Even if they see an economic opportunity, they simply cannot find a financing source to allow them to expand beyond their current capacity.
The second area of concern is ... consumers. Historically consumers borrowed money for big-ticket items. Things such as cars, appliances, big screen TVs are typically bought on credit. And both car dealers and appliance stores routinely go through banks to source their credit. Folks with less than a 700 credit score are having an extremely difficult time securing credit.
And the problem is that once you go into a Home Depot or a Best Buy and you try to buy a refrigerator and you get turned down for credit, that one embarrassment is enough to keep you out of that, and you don't go to Lowe's or the next store down the road and try again. And those products don't get made, and ... people don't get jobs to make those things.
Q: What do you think should be done about the problem?
The president needs to stand up and talk to the American people and tell them this is a bad thing to vilify the financial sector of the economy. And he's as guilty as the next guy. I mean, every time he talks about the bankers he talks about the fat cats of Wall Street.
I will not try to justify the mistakes that they made, and I will not try to rationalize the salaries that they make. You can feel about those however you want to feel about them. But there is one incredibly important fact, and that is: This economy will not work without financing.
We have got to de-vilify the bankers so that they are not afraid of public retribution should they get individually into some difficulty or some liquidity issues and need to borrow from the Fed again six months, nine months, a year and a half down the road.
We've created this incredibly divisive environment that, while it maybe feels good to punish the bankers, it is not in the interest of the economy and certainly not in the interest of the 7 million people who've lost their jobs.
