If no one wants to borrow money even as long-term interest rates are low and going lower, then it’s hard to see how a bank is going to make money. That, at least, is the view of an analyst at Goldman Sachs Group Inc. (NYSE:GS) who has cut 2011 price targets and EPS estimates for seven large US banks.

Analyst Richard Ramsden cut Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C) J.P. Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS), PNC Financial Services (NYSE: PNC), US Bancorp NYSE: USB), and Wells Fargo & Co. (NYSE: WFC) by an average of 7% and earnings by an average of 7% in 2011 and 5% in 2012. Ratings on the banks did not change. The following chart summarizes the changes.

Ramsden’s report, cited at zerohedge.com, noted, “Loans were down 1% this quarter, with chargeoffs remaining a big source of shrinkage. We analyze the economic factors driving loan growth and conclude that year-over-year growth will not turn positive until 2011. Run-off portfolios which account for 10% of system wide loans will drive a further 3% shrinkage in 2011.” This is not a formula for economic recovery.

There have been numerous stories recently about the amount of cash that companies are sitting on instead of spending. Surely, the thinking goes, a company might use some of its cash to expand and hire new staff. Or at least use some cash to leverage a larger loan to expand.

But most companies, from Wall Street to Main Street, see no reason to grow. The companies can’t sell what they’re making now because consumers are not spending. And consumers are not only not spending, they’re not borrowing either.

And why should they? Employment is stalled, wages are not improving, and homeowners can no longer use their houses as ATMs.

Bill Gross, manager of PIMCO’s $239 billion Total Return Fund, has recommended an economic stimulus plan that would refinance at current rates all government-backed mortgages not in default. By one estimate, that would save homeowners a collective $46 billion a year, which they would then spend. Gross believes that such a refinancing would raise consumer spending by $50-$60 billion a year and raise house prices by 5%-10%.

Gross points out that such a move would not increase the federal deficit and, perhaps more important, could be accomplished without legislation. The plan clearly favors Main Street over Wall Street, and Gross says that it’s about time, “I’d say that Wall Street has been favored enough over the past year and a half, so let’s give Main Street a chance.”

The big problem though would be the loss to investors in mortgage-backed securities. Pre-payments on existing mortgages could cost investors as much as $500 billion. Could the Obama administration survive the fury if it took this action? Gross estimated that a major refinancing program such as this would cost PIMCO $3-$4 billion in losses.

The US economy won’t recover fully until consumers start to spend again. Until that happens, banks won’t make loans, businesses won’t hire, and wages won’t grow. In other words, the US in the second decade of the 21st century will look a lot like Japan in the last decade of the 20th.

Paul Ausick

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