Friday, August 19, 2011

Bank lending continues to increase


I keep updating this chart because it represents good news that is not getting enough attention, especially these days with the banking panic in Europe and the mad scramble for safety that has pushed 3-mo. T-bill yields to zero. The story here is that for almost one year now, banks have been increasing their lending to small and medium-sized businesses; over the past six months, C&I Loans have increased at a 9.1% annualized rate. That's fairly impressive, and it directly contradicts the notion that the economy is being depressed because everyone is still trying to deleverage. It's not that more loans are good per se, it's that more loans are prima facie evidence that risk-aversion is on the decline. After all, it takes someone willing to accept risk before you can have productive investments that grow the economy. Companies are more willing, on net, to leverage up, and banks are more willing, on net, to lend more. It further suggests that the stress that is punishing the Eurozone banking system is not spreading to the US. There is hope for the future.

11 comments:

Jim said...

I would like to know what businesses. Most of the business owners that I have talked to have a hell of a time getting a straight SBA one.

Bill said...

My line of credit was closed a few months back and a repayment schedule demanded despite a long track record of faithful payments and it wasn't close to being maxed out. I have not shopped around recently but Jim's observances seem pretty typical to me.

I also have a client who was promised by the bank a new loan for their start up manufacturing company if they hit certain sales goals. They met the goals and the bank reneged on their previous promise causing the company to be unable to operate. The result is the company recently shut its doors, filed bankruptcy and now 75 people are out of work.

So, these figures seem a little incongruous to those of us on the front lines. Perhaps the lion's share of the lending is to large firms while small companies go without.

Benjamin said...

You gotta have collateral to get a loan, and that means real estate. A Fed that engaged in QE and nominal GDP targeting would get real estate values inflating again, ergo more small business loans.

BTW Greg Mankin a couple months back predicted possibly lower interest rates and a stock market dump when QEII ended. He was right.

QEIII is a goo idea, and moderate inflation.

Dr William J McKibbin said...

Hi Benjamin, I agree that money for small businesses is scarce -- on the other hand, money is certainly available for those with collateral -- the banking world has moved back to its roots, which is collateralized lending rather than cashflow based lending -- I still believe the great inflation is imminent, though that grounding for that inflation is less and less likely to be monetary expansion -- the next great inflation will be driving by sharp increases in hard assets -- once that transition occurs, the price of everything else will follow (with the notable exception of government spending, pensions, and salaries) -- private enterprise stands at the cusp of rejuevnation, albeit by a commodities and asset driven price increases rather than speculation -- let's put it this way, the cost of building a new house is about to go up sharply as the cost of materials and transportation increase -- the future looks bright -- look for rents and dividends to increase.

Dr William J McKibbin said...

PS: Watch for increased stock buybacks by companies in the US -- dividends are about to explode -- investors will demand it...

John said...

Does Scott's graph include loans backed by Freddie and Fannie?

Scott Grannis said...

No, only loans made by commercial banks.

Bill said...

Scott,

I've looked at your posts and those of other sensible and for the most part "optimistic" economists (Mark Perry, Brian Wesbury, etc) right before the panic of 2008 and you all seemed to think the country would avoid recession based on the "real time" metrics of the day. We obviously went over the cliff then. While I certainly understand that these things are very difficult to predict and none of you have said recession is impossible, why do you think your ability to predict recession now is any better than it was in 2008?

Scott Grannis said...

Nobody can presume to know with certainty what the future will bring. Nobody has a perfect record of forecasts--it is impossible. Everyone is wrong at one time or another.

I've posted before (perhaps in Comments) about the mistakes I made in 2007 and 2008. One big one was ignoring the huge increase in swap spreads that started in mid-2007. Another was believing that the yield curve was not sufficiently steep and the real funds rate was not sufficiently high to produce a recession. I should have realized that quite a few indicators were moving in a negative direction, and that should have been enough to raise a red flag. What I failed to appreciate, and I had plenty of company, was the contagion effect of the housing bust, in which so many people were forced to sell things at distressed valuations, a process that quickly generated a downward spiral.

As for this time around, I have been diligent in noting the growing signs of problems in Europe (e.g., very high yields on PIIGS debt, elevated swap spreads, elevated CDS spreads, plunging value of bank equities). Europe is clearly in for some trouble, and the only question I suppose is whether it will be enough to drag the US economy down with it.

I also hope to be more objective going forward than I was in 2007-2008, when I was more or less obligated to participate in group forecasts and to tow a party line.

Jim said...

I think it is safe to say that if there is panic in Europe and Asia that US bonds would be flying. Many are making the argument that yields are low enough, but the 10 year still can easily have another 100 basis point to the downside by the yield curve flattening.

John said...

The spike in commodities, especially oil in 2008, forced many to decide whether to pay the mortgage or buy gas for their cars. A lot of homeowners got behind and, with no pay raises, eventually threw in the towel.