The Feds.....Scared to Death

I have a few friends in small town local banks. What I am hearing is amazing. The yearly audits by the FDIC is nothing like it has been the last few years. The demands being placed on rock solid conservative banks are incredible. Unlike the Washington Mutals of the world most small town banks stuck to their bread and butter. They are doing the same thing they did last year and the year before and five years ago. Simply relationship banking. When they made a loan they knew who was on the other side of it, rumors about whether they have started drinking excessively, how their jobs are going, what is going on with their families etc. Small town conservative know thou customer banking. Now the FDIC is running scared ********. The bank failures coming will be massive and so they are cracking down on everyone. This of course means that those who behaved themselves will also get punished. It always does. You get a special privilege from a teacher in a high school class, someone abuses it, and the privilege is gone for everyone. The way the world works.

The greater danger this implies in my mind, is the impact it has on credit availability. Even though money is becoming cheaper, it is becoming harder and harder to get it. Those loans that are good risk reward scenarios are not getting made. Only those loans that have zero % of defaulting are being made and the truth is those loans are probably not needed by those who are taking them. When money gets really cheap but really scarce, people who don't need the loans are the ones who will take advantage of the cheap money. They could finance it themselves but by borrowing it lowers the cost of capital, so they borrow. Those individuals who have a great idea with great risk reward prospects but who cannot finance it on their own are getting left in the cold. This is not good for the economy. The over reaction correction phrase will cause more pain than would otherwise be felt. We are right in the middle of it and from an economic perspective you will not feel it for 6 to 12 months out. Another reason in my mind we are not at a bottom in the stock market.