Banks: Breathe deeply, and lend

It only took trillions of dollars of government cash and guarantees, but the fear gripping global markets finally has begun to ease.

Now it’s up to the world’s bankers to step up and do their part to keep the credit crisis from unleashing financial Armageddon.

The mood shift so far has been modest, but encouraging. After weeks of mounting panic in markets around the globe, benchmark interest rates on loans between big banks fell this week for the first time since late July, signifying a greater willingness by banks to extend credit to each other.

For example, the so-called Libor rate for one-month loans in dollars slid to 4.18% on Friday from 4.59% a week earlier.


Yields on three-month U.S. Treasury bills, meanwhile, rose to 0.82% from 0.19% a week ago. That suggested that some investors have stopped hoarding super-safe Treasury securities and are moving that money into higher-paying, higher-risk investments.

Most world stock markets recorded their first weekly gains in a month. Although the Dow Jones industrial average fell 127.04 points, or 1.4%, to 8,852.22 on Friday, it rallied 4.8% for the week.

And after months of rumors dominated by speculation about what large financial institution would be next to fail, the whispers on Wall Street on Friday were that a major U.S. bank was lending again to other banks.

Imagine -- a bank making a loan!


Still, credit -- the lifeblood of the economy -- isn’t flowing freely by any means. There was no money to save retailer Mervyn’s, for example; the chain, which filed for bankruptcy protection in July but planned to keep operating, on Friday said it would liquidate.

Tiny Iceland finds itself in financial ruin after being forced to nationalize its banks, which have been unable to refinance debts estimated to total more than 10 times the size of the country’s economy.

And borrowing costs for U.S. companies, if they can borrow at all, have continued to soar. The annualized yield on an index of 100 junk-bond issues tracked by KDP Investment Advisors -- a measure of the interest a high-risk company would have to pay on new bonds -- jumped to 16.31% on Friday, up from 10.6% just five weeks ago.

Still, to see even the tentative improvements in credit markets this week was psychologically important for banks, investors, companies and government regulators.


“I think we’re on the verge of some sort of resolution” of the credit crisis, said George Goncalves, a bond strategist at brokerage Morgan Stanley.

But it will be a long, long process, he and most other market analysts caution.

We all know the basic problem: The debt bubble that fueled the U.S. housing boom has imploded. Investors worldwide who owned that debt have suffered massive losses as mortgage defaults have rocketed. That has led to failures or near-failures of some of the biggest financial institutions, in turn causing lenders to stop lending for fear of being on the hook to the next casualty.

As conditions worsened, the U.S. and other governments were forced to launch a shock-and-awe campaign over the last week to forestall financial calamity.


Banks have been given unlimited access to short-term loans from central banks. European governments offered trillions of dollars in guarantees of their banks’ debts, a step aimed at restoring the institutions’ confidence in lending to each other.

In the U.S., the Treasury said it would begin direct capital injections into banks to bolster their finances. To calm the public’s worries about bank safety, Congress boosted basic federal deposit insurance coverage to $250,000 per account from $100,000.

And yet to launch is the original $700-billion Treasury-funded program to take bad mortgage loans off banks’ books, to repair lenders’ shredded balance sheets.

By now, the public has to be exasperated, wondering what other handouts governments -- and taxpayers -- could possibly be asked to provide to bankers.


One irony this week was that individual investors showed gumption that has been lacking among skittish big-money players.

With the municipal debt markets iced over, California faced the possibility of being unable to raise the billions of dollars it needs at this time of year to patch its seasonal budget shortfall. But when the state offered $4 billion in tax-free, short-term IOUs for sale on Tuesday and Wednesday, individual investors put in orders to buy nearly all of them -- allowing Sacramento to expand the sale to $5 billion.

Now consumers and businesses want to see banks move assertively to reopen the credit spigots.

But will they? With the credit crisis slamming the economy and almost assuredly sending it into recession, banks normally would be more cautious about lending at this point, not less so.


With taxpayers’ money already backstopping so much of the banking system, however, lenders risk infuriating the public if credit conditions don’t continue to improve.

Interviewed on CNBC this week, Treasury Secretary Henry M. Paulson was asked whether he would be jawboning banks that are benefiting from government aid to get back to the business of providing the basic credit the economy needs to survive.

“I will clearly be doing that, but I will also say to you that they understand this,” he said.

For our sakes, and theirs, that had better be true.