Understanding Why Banks May Not Immediately Lend, and What It Means for You

Big news in the New York Times today - the banks receiving taxpayer cash transfusions may not turn around and use it for lending for a while (the story says quarters - which is Wall Street speak for 3-6 months). You need to read this story and understand why the banks think this, and what it means to you.

Here's why you care: Remember on Tuesday when we pointed out that the shift in the government's plan from emphasizing buying and selling of the mortgage related bank assets to direct cash injection into U.S. banks would likely be "debated in the days, months, years to come depending on how successful it is"...?

Recall yesterday that we pointed to a story with Federal Deposit Insurance Corp. (FDIC) head, Sheila Bair, raising all sorts of warning flags by arguing that not enough was being done for the homeowner to stay in her house? Her argument essentially is that the economy won't right itself until housing prices stabilize.

If you put the three stories together you come out with this: Buried in today's story is an important quote from JPMorgan chairman and chief executive, Jamie Dimon, “It’s clear that the government would like us to use the capital. ...If you are a bank that is filling a hole, you obviously can’t do that.” Mr. Dimon is evidently not talking about JPMorgan but about other banks being in a hole.

Thus, if the banks are so bad off that they need to replenish before they can simply lend... AND if Ms. Bair is right about rescuing the homeowner, you end up realizing that the government will have a lot of pressure to fill the gap for the next 3-6 months before the wheels of lending actually start moving.

That leads us to the point we've also emphasized, keep an eye out for Capitol Hill stories about another stimulus bill - i.e. a cash transfusion into the taxpayer.

Now that you are sufficiently stressed out for both 2008 and 2009, we suggest reading Warren Buffet's op-ed piece in today's New York Times. It will provide some longterm perspective.