Politicians seem to have succeeded in bullying the nation’s bankers into lending their newfound, vote buying government capital. Politicians didn’t agree to jam taxpayer money down the gaping balance sheets of the nation’s banks without expecting something in return. It’s an election year if you hadn’t heard and the economy is not exactly humming on all cylinders. The Fed’s rate cutting campaign and balance sheet expanding isn’t working fast enough, or at all for that matter. So when Don Schumer says lend, the nation’s banks step lively:

Now, though, some banks are revving up plans to pour their new capital into loans. “We do expect to start deploying it almost immediately,” said Doyle Arnold, chief financial officer of Zions Bancorp, a Salt Lake City lender that is slated to receive $1.4 billion through TARP. Two weeks ago, Mr. Arnold predicted the federal injections probably would have a muted impact on lending.

Zions, with $54 billion of assets and more than 500 branches, “basically shut down” its lending operations in the third quarter due to depleted capital levels, Mr. Arnold said. Its coffers replenished, Zions now plans to lend out “several hundred million dollars” by year’s end. Next year, Zions expects to be able to make as much as $750 million worth of new loans each quarter.

So our nation’s fine leaders have handed over a chunk of our money to an outfit that seems quite good at lending. Unfortunately, they don’t seem very good at collecting. They exhausted their capital making lousy loans during boom times and now we expect them to lend out public capital in the middle of a recession and do a better job? Color me skeptical.

Yes, it seems we have a catastrophe on our hands. There’s not enough lending going on. How much is lending down you ask? Well, the numbers are just ghastly but here they are:

As of Sept. 30, total loans at 24 U.S. banks that are expecting to get $124 billion in combined infusions declined 0.3% to $3.8 trillion from three months earlier, the second-straight quarterly decline, according to an analysis of their financial data by The Wall Street Journal. The retrenchment threatens to knock the U.S. economy into an even deeper recession, regardless of the government’s aid, as businesses and consumers struggle to get loans.

Oh my God! How can our economy survive when loans at these important banks drop by 0.3%? We don’t know yet what happened to lending in October and I’m sure it dropped more than 0.3%, but that was a function of the banks and everyone else waiting around to see what Paulson and Co. were going to do to bail us all out of what they assured us was the greatest crisis since the Great Depression. Who knows what would have happened if all of Washington hadn’t panicked in such a public fashion.

What about the quality of the borrowers in these forced transactions? Based on current interest rate spreads, it doesn’t make sense to lend the money to prime customers. The dividend on the government preferred is 5% and the prime rate is at 4%. Now, I wouldn’t do that deal but maybe it makes sense if you’re a banker. Besides, the best customers don’t need the funds:

Some bankers say they are making fewer loans because fewer customers want them. Many businesses, bracing for a prolonged economic slump, have shelved expansion plans that would have required them to line up a loan.

“A lot of that is not related to banks not willing to lend. It’s demand-driven,” said William J. Reuter, CEO of Susquehanna Bancshares Inc., a Lititz, Pa., lender with more than 230 branches and about $14 billion in assets. “Customers are hunkering down more.”

Yeah, that happens in a recession. Demand for loans falls so what are banks supposed to do? Stand on a street corner and beg people to take the government money? “Please, please take this loan. If you don’t take it the Don…er Congressman will be really upset. We can’t have that can we?”

Is our economy so fragile that it can’t take a modest reduction in lending and borrowing? Surely, that must mean we’ve reached the limit on Uncle Sam’s Visa card. Repeat after me:

If the problem is too much debt, more debt will not solve it.

If the problem is too much debt, more debt will not solve it.

If the problem is too much debt, more debt will not solve it.