No surprise: Banks continue to slow lending

Most consumers know what The Wall Street Journal proved today: The total number of loans held by 15 large U.S. banks shrank by 2.8 percent in the second quarter. All you have to do is talk to friends and neighbors about lending and you'll find story after story about difficulties getting a loan or mortgage.

More than half of the new loans made by banks in April and May were for refinancing mortgages and renewing credit to business, not new loans. Some analysts told the Journal they don't expect to see loan portfolios grow until the second half of 2010.

So we ask again: What happened to the TARP funds that were supposed to be spent on stimulating the economy?

While everyone knows it didn't go toward stimulating the economy, Ben Bernanke was cryptic on where exactly it did go in his town hall forum this weekend, "I don't expect to see another TARP program because at this point the money isn't being used for financial stabilization but for other things."

Banks have been using TARP funds that were supposed to ultimately increase lending to instead merge with other banks or for their investment banking or trading activities. Four of the bailed out banks -- Bank of America, Citigroup, JP Morgan Chase and Goldman Sachs -- reported a total of $13.6 billion in profits in the second quarter, just a year after they lost a combined $20.8 billion. So all that TARP did was rejuvenate the big banks and ignore the financial needs of the rest of the population. The banks do not have to report how they spend the funds and they certainly haven't been using the funds to make new loans.

For example, one large TARP bailout recipient -- Bank of America (BAC) -- reported its loan portfolio fell 3.6 percent in the second quarter. The bank blamed the decrease on higher loan losses and lower loan demand as borrowers paid off outstanding debts. I wonder have much of the lower demand is because the bank lowered the available credit on those borrowers? Bank of America and other major banks have been aggressively lowering available credit on equity lines and credit cards.

But when you look back at the language when TARP was passed, you can see it was intended to stabilize the financial markets. The only thing said about lending was, "With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth."

Consumer spending has led us out of most recessions, but consumers can't help this time because credit is so tight. So, when will the Treasury Department and the Fed pressure banks to ease up on lending?

They've thrown trillions at the problem, but don't seem to be getting any bang for the buck -- except helping the banks to turn a profit. It's time to stop worrying about Wall Street profits and start worrying about Main Street in any new economic policies.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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