Over the next couple of months the banks will almost certainly report that they were profitable during the final three months of 2009 and are on the road to recovery.
Don’t believe it.
The turnaround banks are touting is only possible because they’re still refusing to acknowledge all of the bad loans on their books.
So far, banks have written off about $600 billion in losses from the housing bubble and recession.
Estimates that we’ve seen from banking industry analysts project their true losses to be anywhere from a merely disastrous $1.6 trillion to a truly staggering $3.8 trillion.
So in the best case scenario, banks have acknowledged only about one-third of the losses they’ve suffered. In the worst case scenario they’ve dealt with a paltry one-sixth of those losses.
The losses banks are refusing to write down dwarf the profits they’ve supposedly made since the financial crisis struck in late 2008.
Allowing overvalued loans to remain on the books was part of the Federal Reserve and Treasury Department’s effort to save the nation’s banking industry from collapse.
But that policy is now working against the government’s push to get banks lending again.
The Fed is providing banks with virtually all of the free money they could possibly want. (It does that by making short-term loans to commercial banks for 0% to 0.25%).
That’s why banks don’t need our deposits and continue slashing interest rates on all types of savings to record low after record low.
Yet the banks will never respond to the Fed’s incentives and make new loans when they still have so many bad loans on their books.
So the Fed needs to get tough and make the banks acknowledge all of their overvalued assets now, even if it means they’ll have a couple of unprofitable quarters this year.
It’s a critical step towards getting the banks to lend again, getting the Fed to stop driving down interest rates, and getting decent returns for millions of savers.
That’s the real road to recovery.
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