By: The shadow

The federal bailout of many banks during the past ten months has a lot of us wondering: If the banks are receiving federal monies, where is it all going? Why aren’t the banks turning around and lending it out to businesses, consumers, homeowners and credit seekers?

Banks become risk averse in downturns. Ironically, during downward expansion it may pay-off to fund companies and homebuyers. People can buy businesses or properties at lower prices from a historical comparative. The loans would be made at bottoms of markets. Any risk “later” and businesses or homebuyers could “sell” in presumably “better times” at higher prices or prices at which lenders could get their “money back”.

Many lenders (banks) do not look at it this way. Instead, banks and others wait until data shows “good times” are back and then the coffers “open wide” and the “wheel barrel” of monies flows out. Banks are like all of us who start buying when times are good or we see others buy and so we want to buy.

Unfortunately, when most of us start buying its already in the middle or end of a cycle and another dip is about to happen. Banks become paralyzed on downturns. They speak like its never going to turn around in the short run. They are pessimistic by nature and slow movers. The see things half empty. They want to break even on a loan. They lend money when all the stars align.

Banks get fat and happy in good times. They lend money and make money. Rarely do they ever see the bad times coming. Small business owners actually see bad times coming well before it’s announced in the WSJ or CNN. Sales slow; inventories sit and customers slow down.

Banks become competitive with one another and want to record loans and make money. Risk sometimes gets swept under the carpet as the good times roll. Everyone looks in the rear mirror and says ; why did we invest or loan to this area?

Its simple: Banks follow the herd a lot just like consumers, owners and buyers. The problem becomes the herd always leads us into the swamp…. eventually.