The Next Wave Of The Credit Crisis: Banks Stop Loans To One Another

A bank that will not loan money to any other banks will probably not loan money to anyone, no matter how favorable their credit profiles may be.

According to The Wall Street Journal, "Banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday."

The market craves capital now. Banks that have short-term liquidity problems cannot turn to peers. If capital reserves at these institutions fall too far, they risk being visited by the FDIC. The agency is troubled by its own low reserves, which means it will have to go to Treasury for more capital. The borrowing from the US government to keep the system stable keeps rising.

The wider problem is the lack of capital for businesses and consumers. The most obvious case involves home buyers who cannot secure mortgages. As they are turned away, the inventory of homes grows and real estate prices are bound to fall further.

Capital expenditures at most businesses rely on either lines of credit or business loans. The growth of the capital goods market is already in trouble. Manufacturers who make products which cost over $100,000 are likely to face cash shortages which will challenge their ability to keep their doors open. At the very least, they will cut capacity and jobs.

Lines of credit are also an essential part of the balance sheet management at car companies and airlines. A lock-up in lending may be the action that finally tips one or more into Chapter 11.

Money borrowed from the Fed by banks has no strings attached, as long as it is paid back. The firms use it to build there own reserves and put next to nothing into the manufacturing and service sectors. If the government will bail out banks and insurance companies, it would be wise to bail out the lending system which is a part of almost every industry in the country. Fed money could come with one caveat. Some portion of it has to go out in the form or loans.

Douglas A. McIntyre