Finance Blog number 1

Banks that took billions of dollars in taxpayer aid clamped down on credit during the month of March, according to a Treasury Department report published Monday.

In its first broad-based view of lending activity of the 500 financial institutions that received money under the agency’s Capital Purchase Program, the Treasury said the total amount of loans outstanding contracted by 0.8% in March to $5.24 trillion from $5.28 trillion in February.

The report, which included everyone from smaller community banks to major national banks like Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), revealed that banks pulled back the most on new business loans. The amount of commercial loans outstanding fell 1.2% to $2.35 trillion.

The amount of consumer loans, including residential mortgages, student loans and credit card lines, fell by less than half that amount, declining 0.5% in March to $2.88 trillion in March.

Monday’s report marks the first time that Treasury provided any details about lending activity by regional and community banks that received government aid under the program, still commonly referred to as the Troubled Asset Relief Program, or TARP payday loans lenders.

Since February, the agency has been providing monthly data on lending activity at the country’s 21 largest financial institutions to provide a better sense of just how these banks were using billions of dollars in taxpayer funds.

Treasury said Monday’s announcement was part of that effort to ensure greater transparency

So far, roughly $200 billion has been invested in more than 500 financial institutions across the country as part of the Treasury’s capital purchase program. Banks have broadly come under fire for not using those funds to make new loans or extend existing lines of credit to consumers and businesses.

Banks have maintained, however, that they are lending even as the appetite for new loans has fallen. Demand for commercial real estate and business loans, for example, have dwindled in recent months as many companies pared back expansion plans — a trend that banks predict will continue. 

Source

Treasury Secretary Timothy Geithner told China that the U.S. wants to shrink its budget gap as soon as an economic recovery takes hold, reassuring the nation that is the biggest holder of U.S. government debt.

The U.S. goal is a deficit of “roughly 3 percent” of gross domestic product from a projected 12.9 percent this year, Geithner reaffirmed today in a speech in Beijing.

Geithner’s maiden visit to China as treasury secretary aims to deepen cooperation in dealing with the global financial crisis in meetings with Premier Wen Jiabao, President Hu Jintao and Vice Premier Wang Qishan. U.S. government debt has this year handed investors the worst loss since at least 1977 on forecasts for ballooning deficits and Wen has expressed concern about the “safety” of China’s dollar assets.

“The Chinese public is worried about the safety of its foreign-exchange reserves,” said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “If America fails to adjust its economy by increasing its saving rate and reducing its current account deficit another financial crisis triggered by a dollar crisis could be inevitable,” Yu said in an e-mail.

China held about $768 billion of Treasuries as of March. For the fiscal year that ends Sept. 30, the U.S. deficit is projected to reach a record $1.75 trillion from last year’s $455 billion shortfall, according to the Congressional Budget Office.

‘Sustainable’ Deficit

Geithner said that China’s investments in U.S. financial assets are very safe, and that the U.S. is committed to a strong dollar.

“We are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term,” Geithner said. “This will mean bringing the imbalance between our fiscal resources and our expenditures down to the point — roughly 3 percent of GDP — where the overall level of public debt to GDP is definitely on a downward path.”

The U.S. will need to phase out the tax cuts and bank rescue programs set up to help the economy recover from a deep recession, Geithner said. Spending cuts also will be needed, along with health care reform and new budget constraints like pay-as-you-go rules fast cash advance.

The global economic recession “seems to be losing force” although recovery will be a long and slow process, he said, acknowledging General Motors Corp. factory closures and its corporate reorganization being announced today in Washington.

China’s manufacturing expanded in May, two reports showed today, in response to the country’s 4 trillion yuan ($585 billion) stimulus package announced last year.

Avoiding Showdown

In his prepared remarks, Geithner repeated the U.S. desire for a more flexible yuan. He has avoided a showdown on the issue, declining to repeat comments he made in written remarks to lawmakers after his Senate confirmation hearing in January that China was “manipulating” its currency.

China has stalled gains by the yuan against the dollar since July last year after the 21 percent increase that followed the scrapping of a fixed-exchange rate three years earlier. The Chinese currency traded at 6.8283 per dollar as of 1:56 p.m. in Shanghai today.

In his remarks today, Geithner said China needs to shift its economy to rely more on domestic demand than exports.

“Allowing the market, interest rates and other prices to function to encourage the shift in production will be particularly important,” he said. “An important part of this strategy is the government’s commitment to move toward a more flexible exchange-rate regime.”

U.S. Banks

In comments after his speech, Geithner said “very successful” efforts by U.S. banks to raise new capital will provide a “much larger cushion” against future losses.

Geithner will meet tomorrow with Wen, who in March called for the U.S. to “guarantee the safety of China’s assets.”

Geithner said Hu and President Barack Obama agreed in April to establish a strategic and economic dialogue that will be held in Washington next month. He and Secretary of State Hillary Clinton will host Vice Premier Wang Qishan and Dai Bingguo, a state councilor.

Source

Former Bank of England policy maker David Blanchflower said there will be “big increases” in unemployment and Britain must brace itself for the shock.

Jobless claims may rise by an average of 100,000 a month “for the next year or so, and this will be a shock for people,” he said in an interview on BBC Radio 4 today. “People are going to have to get used to these very large numbers. I don’t think people have thought what it would mean to have a million people under 25 unemployed by September.”

He said it’s “early days” to gauge whether the central bank’s policies are helping to counter the recession. The Bank of England may decide this week to leave the benchmark interest rate at 0.5 percent and to continue its plan to buy bonds with newly printed money, economists say.

“There are risks to the downside,” he said faxless payday loan. “We’ve seen over-exuberance in lending and borrowing that’s been a problem. People have had to come back to reality.”

Blanchflower spoke the day after he stepped down from a three-year term on the Monetary Policy Committee, where he said as early as November 2007 that the U.K. may face a recession, before any of his colleagues.

Policy makers, due to meet on June 4, will refrain from expanding their money-printing plan from the current 125 billion pounds ($204 billion), according to all but two of 39 forecasts in a Bloomberg News survey of economists. A separate survey also showed they will leave the key interest rate unchanged.

Source