The banks aren’t lending. And despite what you have heard, they probably won’t start just yet.

The stock market may be way up on expectations of a credit thaw on Wall Street — and there has already been a minor one — but don’t hold your breath on Main Street. The dirty little secret of the government’s $250 billion handout to nine banks to get them lending again is this: So far, they have stuffed it under their mattress like the rest of us.

Need a mortgage? An auto loan? If you are a business or consumer, it’s almost as hard to get a loan this week as it was last.

Sure, there are some positive signs that the credit market is opening up a bit: Libor rates, the price at which banks lend to each other, have crept down in recent days, greasing the wheels of capitalism, or at least what’s left of it. Some banks, like JPMorgan Chase and Citigroup, actually made loans to banks in Europe on Friday. These are all important steps on the way to a recovery.

But make no mistake, the banks are doing the opposite of what Henry M. Paulson Jr., the Treasury secretary, sought when he virtually demanded that they accept the taxpayers’ money: They are hoarding it. It’s a bit like the government’s sending out tax rebate checks and the consumers’ not immediately running out and spending them.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.”

Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Indeed, if there’s a reason the stock market went up Monday, it was because Fed chairman Ben Bernanke told Congress he was in favor of a second economic stimulus plan, a tacit acknowledgment that recent efforts to repair the financial system won’t be enough to dig the economy out of its rut.

Think about it: troubled companies are still troubled companies. And while banks often stupidly throw money at questionable companies in good times, they shut off the spigot in bad times.

(See Andrew Ross Sorkin's latest appearance on CNBC in the video)

On top of all that, the banks may still be in more trouble than they have disclosed. Indeed, the reason many may be holding onto the government’s cash is because they expect things to get worse not just for the economy, but for themselves.

Roger Bootle and Jonathan Loynes of Capital Economics in London wrote a sobering note on Monday about the cash infusions into European banks that may apply here as well. “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one,” they said. “Given that banks will need to increase their capital in order to expand their lending book, these measures on their own are unlikely to prevent bank lending from stagnating.”

What else can government do? One of the last arrows in its quiver is the controversial idea of reducing the amount of capital banks must hold. That might make the banks more comfortable to lend, but it would put banks on an even less stable footing, and undermines the overall idea of injecting capital into banks in the first place.

That is not to say that Mr. Paulson’s $250 billion package won’t be helpful to the economy. It is a smart plan to help to encourage bank lending, which may prevent the economy from spiraling downward even more into a prolonged depression. And it should keep some more banks from going bust, which would have only added fuel to what seemed like an out-of-control fire. But it is not a silver bullet.

And the bailout also may be concealing another problem: Because the government gave money to both healthy and unhealthy banks, that may make it harder to tell which ones are in more trouble than the others. That’s why banks have been so wary of lending to other banks. Although a key gauge of this psychology, the Libor rate, has improved since governments moved to repair the financial system, some banks are still worried they can’t trust their counterparts to pay the loan back.

Ken Lewis, the chief executive of Bank of America

BAC loading...

Quote  |  Chart  |  News  |  Profile

[BAC  Loading...      ()   ], in an appearance on “60 Minutes” on Sunday night, said in perhaps one of the most revealing comments of the credit crisis that the reason strong banks like his got $25 billion apiece was to help conceal the weakness of those that have fallen into dire straits.

“If you have a bank in that group that really, really needed the capital, you don’t want to expose that bank,” Mr. Lewis said.

Still, Mr. Lewis says he’s bullish that things will eventually turn around, though he thinks we won’t see a bottom until at least the first half of next year. And he suggested that banks won’t keep money under the mattress forever. “You can make more money lending,” he said.

At least to people who don’t need it.

• Check on Markets Here ...
  

Tools:

Print Email

• 

CNBC HIGHLIGHTS

» More: Blogs | Slideshows | Special Reports | Top Video

• 

• Starter's Guide 

• Where, what, how.

• Choices Indices 
• Solar Tech Value 
• US Ranking Funds & ETF 
• Water White Tags 

• 

• Buffett & Gates Talk At Columbia 

• Warren Buffett and Bill Gates spoke to Columbia students, and Buffett made the students a startling offer.

• 

• The Roberts Way 

• For the chief of cable company Comcast, growth has been about making deals – generally very large deals.

• GE Talks Go Slowly 

• 

• Carbon Insurance 

• Some companies may start using insurance to shift carbon risk from their balance sheets to maybe... yours?

• 

• Acai In The Big Box 

• The president and founder of Genesis Today wants to improve America’s health, and thinks Wal-Mart can help.

• 

• Vent Your Rage 

• If a terrible driver on you morning commute has you feeling like you want to scream, check out this website.

• Funny Business Blog 

COMMENTS

More Comments

 

« First | « Previous

Next » | Last »

Thank you for joining our discussion. Your comment has been posted.

ADD COMMENTS

Please Sign In or Register to participate.

In order to add a comment you must click here and accept our terms and conditions.

Edit Screen Name

Please sign-in/optin or register to be able to submit comments.

Remaining characters

CNBC welcomes your contribution. Please respect our community and the integrity of its participants. CNBC reserves the right to moderate and approve your comment.

PREVIEW COMMENT

Your comments have not been posted yet.
Please review your submission to make sure you are comfortable with your entry.

Your Comments: