Friday, May 6, 2011

Bank lending continues to pick up

Commercial & Industrial Loans (bank lending to small and medium-sized businesses) continue to demonstrate that we have passed an important advance in the business cycle. C&I Loans have risen at a 8.6% annualized rate over the past three months, a rate that begins to look pretty decent. That, after loans fell precipitously from late 2008 through late 2010.

Each time I post an update of this chart I get comments to the effect that it is still difficult for many businesses to get a loan. I don't doubt that at all, since total loans are still far below where they were just a few years ago. But it is nevertheless true that, on the margin, things are improving, and that's the most important.

The important thing about increased bank lending isn't that more lending will fuel economic growth; it's that more lending reflects increased confidence on the part of banks and businesses to take risks, and it's risk-taking that fuels growth. Government spending can't fuel growth, because the decision makers who direct the spending are not taking risks in the hopes of generating profit. They are simply agreeing to fund, with taxpayers' money, projects that sound important and will help them win votes in upcoming elections from favored groups. High-speed rail is a good example, since it sounds great, but if it were truly great (i.e., profitable), then there would be no shortage of private capital willing to undertake the task. As it is, profitable train lines are an endangered species.


Benjamin Cole said...

I assume you profitable passenger train lines. I think the freight guys are doing good trade.

Glad to see loans going up. I am not sure that it reflects bank confidence as much as commercial real estate values no longer going down. Most small biz guys have to borrow against collateral, and that means real estate. Gee, the banks don't give you money for having nice numbers to wave at them.

We need a rally in commercial real estate to get things cooking. When you see commercial real estate go up, get ready for better than a peek-a-boo recovery.

Benjamin Cole said...

Thomson Reuters/Jefferies CRB Index (TRJ/CRB)

For more than 50 years, this world-renowned index has served as the most widely recognized measure of global commodities markets. As a benchmark, the Thomson Reuters/Jefferies CRB Index is designed to provide timely and accurate representation of a long-only, broadly diversified investment in commodities through a transparent and disciplined calculation methodology.

The history of the Thomson Reuters/Jefferies CRB Index dates back to 1957, when the Commodity Research Bureau constructed an index comprised of 28 commodities that made its inaugural appearance in the 1958 CRB Commodity Year Book.

I realize there are all manner of indices.

This above commodities index says that commodities, as a group, are about where they were 2006, price-wise.

The DJIA where it was in 1999.

We have declining labor costs.

If true, we have real estate dead, maybe at 2005 prices.

Commodities now going down but where they were in 2006.

Yet many influential economists and pundits are screaming about an too-liberal money supply.

You wonder how Japan stayed with a crummy monetary policy for 20 years?

I think I am getting a clue.

Scott Grannis said...

The CRB index indeed has a long history, but it also has a fairly large exposure to crude oil and products. Since oil prices are one-third less today than they were in mid-2008, the index is not trading at new highs.

I have always preferred 1) the CRB Spot Commodity index because it contains no energy, and 2) the Journal of Commerce index because it's exposure to energy is limited. Both of these are trading very near all-time highs.

McKibbinUSA said...

I suspect that bank lending will pickup on a pace similar to employment in the US -- the US still has to work through the ongoing Main Street Depression, as well as the follow-on dollar inflation -- the difficult economic path ahead for the US will be difficult, painful, and will take time -- a full US economic recovery is unlikely before 2025...

Benjamin Cole said...

There are strengths and weakness, I guess, to every index.

Meanwhile, the US government is borrowing money through 10-year Treasuries at a 3.19 percent interest rates.

That tells me bond investors don't think there is much inflation out there, and real estate investors obviously don't think there is much inflation out there. Unit labor costs are going down.

The DJIA is where it was in 1999. Equity investors must not believe in big inflation either (we have record earnings).

This is inflation?

Bill said...


The DOW closed around 11,400 by the end of December 1999. It closed on Friday at 12,630. Not great but we're still ahead of 1999.

Bill said...

Dr. Mckibbin,

You seem like a nice fellow but you're statement that Main Street is suffering from a Depression is quite ridiculous by any generally accepted economic definition of the term. You really do a disservice to those who actually lived through the Depression when you make such comparisons. I live in the Atlanta area and see an improving economy. Although real estate is still generally in the dumps, houses are starting to move and there is also some improvement in commercial real estate (and Atlanta was hit probably as hard if not harder than most cities in the country).

Benjamin Cole said...


You are correct sir. For some reason, I thought we hit 12,500 or so back then, but we did not.

I will have to re-phrase my commentary to, "We are in the same rough trading range we were in 1999."

BTW, re inflation:

"If you're looking to score a great deal on that cute little home, it turns out you may want to wait a little longer to buy -- like until next year: U.S. home values dropped 3% in the first quarter, their sharpest quarter-over-quarter decline since the dark days of late 2008, according to the Zillow Home Value Index report released Monday."

So house prices are still falling. This is the oddest "inflation" I have ever seen. One in which unit labor costs decline, house prices fall, commercial real estate falls, and the DJIA is roughly where it was in 1999.

Benjamin Cole said...

Zillow is reporting 54 straight months of falling home prices.

Is this what happens when you print too much money?

Bill said...

Benji: How much of the decline in average home prices is due to market forces and how much is due to the large numbers of distressed sales bringing down the average? In other words, if 50% of all home sales are as a result of foreclosures, this make the average sale price look far worse than it really would be if standard sales were a large majority of the sales as in normal times. So, once the backlog of foreclosures is cleared, the average sales price should shoot up regardless of monetary policy.

TradingStrategyLetter - Weekly Summary said...

Bank lending will be the trigger for inflation.