Out of the Box

Eye on the Recession: Where Oh Where Are the Banks?

By Menachem Lubinsky on February 15 2010

I have to admit that I was considering stopping to write this column, not because the recession is over, but because there were so many signs that a recovery might be on the way. The unemployment figures seemed to go down somewhat despite the loss of thousands of jobs. Retailers were more optimistic than they have been in the last two years. Small businesses were beginning to rebound and some were finally benefiting from competitors that had downsized or closed altogether.

Many economists say that a good deal of what happens in a recession is “psychological.” People spend less because they fear that they might need the money just to put food on the table. The same is true for investors who withdraw from new ventures. Even the dollar has shown considerable strength against many strong currencies like the Euro and the Sterling.

But even the most optimistic economists are reluctant to call the 2010 recession a thing of the past and the reason is the banking system in the US. The picture that they see is not a pretty one. They see the stock for Bank of America Merrill Lynch at an all time low of around $14. Citicorp continues to report losses and at least according to some is not out of the woods yet. The US Government continues to be a crutch for some of these largest banking institutions even as Washington signals that this support might not continue indefinitely.

What the economists see is a weak US financial sector, once considered the pillar of the US economy. In recent decades, as the US lost much of its manufacturing dominance to Asia and certainly was no match in energy to the countries of the Middle East, it was the financial sector that carried the day for the US.

A writer for a small financial magazine said this about the banks: “You know the expression that if it looks like a duck, swims like a duck and quacks like a duck, it must be a duck; well the banks do not look anything like banks these days. They are not lending, are offering rock bottom interest rates (making the mattress a good option) and are only bilking customers through astronomical rates on credit cards.”

The economists do not see any appreciable change in the outlook for the banking industry. In fact, there are some predictions that more savings and loans associations are in the red and may fail. Even when there are some signs of life in the mortgage industry, which recently happened on the eve of a Federal Reserve rate hike, it was short-lived and before long the mortgage (and housing industry) doldrums continued.

Economists also link the weakness of the US financial sector to the declining image of the US as the world’s leading economic power. What they are saying is that if the US is to return to its former prominence as the economic leader, it will have to completely overhaul its banking system or more importantly banks will have to be banks once again.

Countries like China took full advantage of the US slide as did other economies. The US did nothing to either compete or reestablish its financial dominance. A prominent marketing guru lamented that the US did not even fight back with a campaign to buy American which ultimately led to the disaster in Detroit, one area of manufacturing that the US was still strong in.

Here is a good example of how things have changed. A businessman recently told me that his bank in 2006 courted him with a proposal to take out a $500,000 line of credit. Afraid that he might indeed use the line and incur debt, something he was always careful not to do, he kept delaying signing on the dotted line. But when the banker suggested that he could borrow from the line for less than half of what the rates for his credit card were, he buckled and signed. The banker reassured him that he had an excellent credit rating and wished him well.

One day, the businessman was offered a closeout of goods worth some $300,000 for $150,000 in cash. As soon as he used the line at the end of 2008, the bank notified him that they had reviewed his credit and would freeze his line, meaning that he now owed the bank $150,000 and could no longer access the rest of the line of credit. He soon found out that he was not alone. The bank was systematically retrenching and even people with excellent credit ratings were having their lines frozen.

It is safe to say that the future of the financial institutions in the country will also determine the future of the US economy. The deep recession began with the collapse of such major financial institutions as Lehman Brothers and Washington Mutual. The end of the recession will come when banks indeed begin acting like banks again. The collapse of the financial institutions sent the economy on a free fall. The recovery will similarly come when the banks put the key back in the ignition, giving new hope to housing, mortgages, investments, and small businesses. For the meantime, my column on the recession stays.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.