This article originally appeared at Credit Writedowns. Note: Since this post was published, three more banks in Georgia have failed. Read details here.
Recently, I have been writing a lot about regional banks and the capital problems they have been having. This is having a direct impact on lending capacity available to small and medium sized businesses (SMEs) and households. As a result, a lot of workers are losing jobs in these smaller enterprises. And the unemployment statistics may not fully reflect this. I see this as a major reason economic growth has been weak.
A high profile regional bank failure came just this week via AmTrust Financial the holding company of AmTrust bank (the former Ohio Savings Bank), leading me to believe regional banks will continue to underperform larger banks, which have been helped by government largesse.
More evidence that the policy skew toward big banks is having a negative impact on small businesses and households comes via the Bloomberg story below. In Georgia I count 21 bank failures this year alone, 27 in total since the subprime crisis began in 2007. Now, much of the reason behind the failures is reckless lending and bankruptcy is the consequence of this risky behaviour.
Nevertheless, the vaporizing of local and regional banks is bound to have a disproportionate effect on SMEs and households. Listen to the accounts in the video below. it shows the cycle in action: reckless lending, overcapacity, bust, and failure. The businessmen interviewed say this has cut them off from viable sources of funding, creating more economic distress. Banker John Poelker says more failures are likely. And that means yet more economic distress. This is one reason that we need more done on the jobs front despite the welcome surprise drop in the unemployment rate earlier today. See my post on that here.
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On the one hand, this shows how the greater part of America is being starved out, in unfair competition to bailed out money center banks. On the other hand, the banks in Georgia surely misallocated capital to overbuild places like Atlanta, and deserve to go broke. Another consequence of the real estate boom may well have been an erosion of whatever ability there ever was to evaluate and invest in productive assets, as opposed to so much linoleum and dry wall. I really think the ruling class is not comfortable with labor , or labor requiring businesses, and has therefore been beguiled by the financial sector, which they are more comfortable with. This is what has led to the gross misallocation of capital into that sector which is the most risky of all, and which therefore requires periodic bail outs. I also believe that anybody with an underwater mortgage was sold a home at a fraudulent price. Whether or not that person enabled the crime against themselves is the question.
Ed:
It appears we have a common ground:
“•The labor force participation rate continues to dive. It was 65.0% SA and 64.9% NSA. The fact that it is still dipping should tell you that, despite the foregoing two bullet points, we are still losing jobs, causing people to fall out of the labor force.”
That the Unemployment Ratio is measured against a smaller portion of the Civiliam Labor Force should tell you why Unemploment improved. From October of 2001 when the 2001 recession ended, Particpation Rate has dropped 1.7%. That is one hell of an expense on the economic infrastructure. Any wage driven inflation certainly is contained here.