Monday, October 26, 2009

Business Loans Record Freefall

We have detailed the deflationary pressures from low capacity utilization and high unemployment before, but John Mauldin details the deflationary pressure coming out of an area that was / is supposed to power the U.S. recovery... businesses. We have detailed the pullback in new loans to consumers, but below shows the reduction in business loans. First to John Mauldin:

Then we have Reduced Borrowing and Lending, as consumers are paying down debt and banks are reducing their lending. Both are necessary in a credit crisis-caused recession. Bank lending is basically back to where it was two years ago, and shows no sign off rebounding. Banks, as I have written, are buying US government debt in an effort to shore up their balance sheets. Lending to small business, the real engine of job creation, is sadly decreasing eachmonth.
The chart below shows the year over year change in business loans as a percent of GDP going back 6o years.

A record drop and this one doesn't yet appear to be slowing down.

Source: BEA / St. Louis Fed


  1. Jake,

    It's not just business loans that are down by a record amount. Total private loans are down by a record amount.

    Absent the Fed, private lending was off over $1 trillion in Q2, 2009 (SAAR).

    The Fed has truly become the lender of last resort. Unfortunately, we need less debt, not more.

  2. we need less debt in the mid to long-run, but in the short run a lot of collateral damage results from pulling the debt rug out from under the economy's feet.

  3. but in the short run a lot of collateral damage results from pulling the debt rug out from under the economy's feet.


    A lot of collateral damage has been done to the majority over the past 20 years as a result of the financialization experiment. There is no fair way to unwind the experiment. That's why I was a proponent of letting the banks fail and having bond holders eat the losses. As painful as it would have been, at least a sense of fairness would have been preserved.

    As it is, the Fed & Gov't have created/preserved a financial oligarchy that will endure for at least a generation. What will be the cost of that as well as the cost of the growing recognition that vast amounts of wealth were not earned but instead garnered from epic government bailouts of financial fraud?

    Also, the majority now have little if any wealth. By some estimmates, the top 10% have approximately 90% of the wealth. A strong argument can be made that the collateral "damage" would have been beneficial to the majority as debts could have been written off or restrucutred.

    The Fed never should have allowed the financial system to become so polluted with bad debt. Once the well was poisoned, there were no easy outs.

  4. Short term thinking got into this mess, maybe short term thinking is not the best way out?

  5. mab- agree with you there. something needs to change and if you are willing to deal with the short term pain of a possible depression, then the final outcome may be everyone with an equal playing field in the long run.

  6. Jake--

    I think we may only be beginning to feel the longer term pain of a moderate, but long depression (if one can call a depression "moderate").

    It seems increasingly clear that the short term Fed "facilities" policies and the Administrations TARP(Bush) and ARRA (Obama) policies have been inadequate to generate sustained economic growth. The Fed's and Treasury's policies have not really saved the banks (merely propped them until accounting and reality take them down) nor led to their increased lending activity. The ARRA has not stemmed the loss of jobs even to the modest extent that the Administration had expected.

    Pretty soon, we're either going to have to do a A LOT more of the same--or something completely different. In the latter category, I would put taking down the TBTF banks as priority #1.

  7. Is it easy to apply and get approved for a business loan? What if for instance the borrower has a bad credit record will he/she still be allowed to apply for the loan? I'm am not that knowledgeable on business loaning so I really need some kind of help on this.