William Spellman, a 44-year-old IT professional from Indianapolis, has come to the realization that the old adage “what goes around, comes around” isn’t true in today’s recession. Spellman has been repeatedly denied a loan for his daughter’s summer school classes by some of the very banks who have been bailed out by his tax dollars, ABC News reports (“Banks Take Billions From TARP, but Give Fewer Loans,” April 21, 2009).

“They need my help, but now they’re unwilling to help me,” Spellman said.

The 21 banks receiving the most bailout money from the Troubled Asset Relief Program made or refinanced 23 percent fewer loans in February than in October when TARP funds were first distributed, according to Treasury Department numbers. And excluding mortgage refinancing, consumer lending amongst these banks fell by one-third during that same time period, both of which suggest that “jawboning by federal officials for banks to use TARP funds to boost lending is having a limited effect” (“TARP Cash Isn’t Moving Forward,” The Wall Street Journal, April 16, 2009).

Banks Say They’re Lending, Just Not As Much As Anticipated

Investigators for the Congressional Oversight Panel on TARP, the independent agency that’s in charge of analyzing how banks are spending their $200 billion in government funds, suggest that consumers like Spellman shouldn’t be so quick to write the bailout off as a failure just because they haven’t personally seen a change in lending.

Neil Barofsky, the Treasury’s special investigator for TARP, said the program has allowed banks to lend more than they would have been able to without the government assistance but that banks just haven’t increased lending as much as the government had hoped.

“A lot of banks have indicated that because they received the TARP funds, they were able to maintain or not reduce lending as much as they would have otherwise,” Barofsky said.

Banks Say Slack in Lending Is Out of Their Hands

Bank executives contend that they haven’t been able to expand lending to meet government and consumer expectations because demand for loans is down.

“I think one of the huge misconceptions out there is that banks aren’t lending,” said JPMorgan Chase CEO Jamie Dimon. “The lending balances are up and down based on demand…”

Dimon also pointed out that the non-bank lenders that have accounted for 75 percent of all lending have all but disappeared in this recession. Now-defunct lending giants Bear Stearns and Lehman Brothers created a huge lending void when they folded, taking their large balance sheets and capital out of the financial markets. Wachovia and Washington Mutual also stepped out of the picture when they failed and were consumed by other banks.

Financial experts, on the other hand, attribute this slack in lending to the simple fact that lenders’ fear of rising consumer defaults have changed the way they lend; a good credit score is no longer enough to secure a line of credit. To this end, banks are tightening their lending restrictions and, before they issue any new loans, are analyzing consumers’ debt-to-income ratios and looking at how efficiently consumers pay off their debts, in addition to just looking at credit score.

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