A simple analysis of the economic recovery. No numbers and no statistics. All your hear about all day is TARP, STRESS tests, credit crunch, repayment of monies by the banks and similar terms that are becoming numbing. The real story is this will take quite some time to work itself out. There will be substantially more damage done during this cathartic process. After all the intervention, the banks now have more than enough cash to lend to consumers and businesses.
The dilemma they have is that they can't lend it to unqualified borrowers and on properties that are still losing value. The only number I'll use here is that over 20% of homes are "underwater". As prices fall, more equity is being lost and the deeper under water we go. Unemployment is increasing which means that employments histories are being broken, which is a negative if you are applying for a loan.
Employees are settling for pay cuts, which mean that they qualify for less. If there is a default on record, that default will stay on a report for at least 5 years. Credit scores are being reduced because credit limits are being cut and defaults are on the rise, now putting consumers in a sub prime category. Sub prime loans, as we all should know by now, means higher rates and higher debt service obligations. With higher costs to repay other loans, the consumer then qualifies for less, and then a bank cannot approve a requested loan.
The banks are really just being prudent and consumers are again caught in a squeeze. If consumers can't consume, business can't sell or manufacture so they have less revenues and they can't get a loan. If businesses can't get loans, they must layoff more employees and the cycle continues. That is the dilemma. The proverbial "bottom" is a long way off. When the bottom is reached, extreme damage will have been done and the recovery will be a very long one.