Taxpayer Dollars Don't Return to Main Street

This post first appeared on Minyanville.

Confirming anecdotal evidence that’s been trickling out for months, Americans banks are reining in lending, despite having been showered with taxpayer money.

The Wall Street Journal examined fourth-quarter results for 10 of the 13 biggest recipients of capital injections from the Treasury Department, finding that loan balances fell 1.4% from the third quarter. Among the banks with reductions in outstanding loans were Bank of America (BAC), Citigroup (C) and JP Morgan (JPM). On the flip side, US Bancorp (USB), BB&T (BBT) and SunTrust Banks (STI) saw modest increases to their portfolios.

Bank executives refute criticism they’re greedily hoarding the cash they received from the Troubled Asset Relief Program, or TARP, saying it’s unrealistic to expect them to both build a cushion against future losses and aggressively make new loans. With consumer and business balance sheets alike smarting from a brutal 2008, low-risk lending is increasingly difficult to find.

Notably, in a trend covered at length by Minyanville’s Kevin Depew, even if banks wanted to start lending again, their debt isn’t wanted. According to a Duke University study cited by the Journal, those same businesses and consumers who watched their wealth evaporate last year are shunning new borrowing. Bankers are seeing demand for new loans slip as cost-conscience Americans brace for tougher times ahead.

Confidence in future earnings, a willingness to take risk and a desire for more “stuff” all drive demand for borrowing. As we turn our backs on excess, forgo buying that $500 Coach bag or $150 pair of Abercrombie jeans, avoiding debt will become second nature.

Nevertheless, as the federal government begins to play an ever-larger role in bank management through its bailouts of Citigroup and Bank of America, certain loans will be forthcoming despite an economic reality bureaucrats are loathe to accept. Citi, for example, is expected to announce plans to allocate part of its TARP money to new student loans, propping up a market badly in need of liquidity.

This government-directed lending -- in which banks are gently told to whom new loans should be made, and in what amount -- is part of the continuing effort to centralize economic power in Washington. Whether lawmakers -- most of whom failed to recognize our troubles before it was too late -- can lead us back to prosperity remains to be seen.