Banks aren't lending. One more One more time

I've talked about the Banks Aren't Lending issue before (1, 2).   Quick summary:

• Since the late '80's, loan originators could originate loans and quickly sell them to investment banks or their surrogates, which bundled loans into securities and sold the securities off to other investors.
• The Credit Crisis is/was basically an implosion of the Shadow Banking System.  That is, private securitization by investment banks is not happening any more.  There are no customers willing to buy the securities.
• The mantel of loan buying has been passed to the GSA's - Fannie, Freddie, FHA.
• Without the latter, there would be no housing market.

(more on securitization here and here.)

Wait!  A few banks are making loans and keeping the loans on their books (eg, see comments here)

Yea, but...  That is, fundamentally, a dumb business for anyone to be in.  This is why only "yokel" banks out in the sticks are actually "lending".  What do I mean?

• Today a bank making a typical home loan ties up, say, $200,000 for 30 years.  
• They get 5.75% on that money.  
• But they pay typically 1.25% (short term deposits) to 3.5% (long term deposits) for the use of the $200K
• Although pundits on CNBC say inflation will begin next year, most folks say it's years away.  Still, at some point rates will rise.
• Within the 30 year period of the loan, the bank is almost guaranteed to be cash-flow negative at some point.
• So the bank relies on the fact that most houses are sold within 10-15 years, and therefore they will come out ahead.
• But this requires being able to fortel the future
• This plan worked most of the 20th century, but not after the late 80's.  Rates became too uncertain, mostly due to securitization.

Or, some version of the above.  If you were running a bank, would you try to wend your way through the above thicket, or, would you originate and sell, making good money on each loan you sell, doing it over and over, and not creating liabilities for yourself stretching out 15 and more years?

Probably securitization will come back in some form some day.  I could foresee a healthy securitization process, but that's another post.  But until it does, the whole housing market is being propped up  by the government, which is buying securities from fannie/freddie with one hand and supporting them with more capital with the other.  The government is essentially making all the housing loans.  But that's not what we have a government for.

From my perspective, right now, there is no way to have a stand-alone, private "housing market", which is not government supported, especially since the overall environment is one of deflation.  People are shedding debt.  The last kind of business which someone would want to start is a loan business - loaning money secured by assets declining in value .

However, thanks to Schumpeter, we all know that without credit, housing, and capitalism itself, are cars without gas.  Welcome to the New Normal. 
Update:  Whadaya know?  Rosenberg (see 'Q2' above) must have read the latter yesterday: "What did the banks do this past week? They replaced cash with government securities – the $47.5 billion net buying was the second largest in the past three years. As the banks find few opportunities to lend – households are either not creditworthy enough to lend to or are busy paying off debts and companies that do have any expansion plans have enough cash on their balance sheet to finance their initiatives – they are likely to use their $1 trillion in excess reserves buying government and related securities, especially with the yield curve so steep and the Fed ensuring that it has no intention of taking the 'carry' away for a long, long time.
... the private credit market is basically defunct, especially when it comes to the securitized loans, which played such a critical role in promoting leveraged economic growth from 2001 to 2007 – the amount of securitized credit that has vanished since the credit bubble burst two years ago is $1.4 trillion – 40% of this market is gone. And what replaced it was this rampant government intervention into the economy – aimed at putting a floor under the economy"

Bill:  Again, they can't make money "lending", so it's either sit on cash, or originate and sell.