Loan Demand, Not Credit, Is the Problem
WILLIAM DUNKELBERG has been Chief Economist for the National Federation of Independent Business (NFIB) since 1971. He is a Professor of Economics at the School of Business and Management, Temple University, where he served as Dean from 1987 through 1994 and as Director of the Center for the Advancement and Study of Entrepreneurship.
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A headline in the Wall Street Journal (4/24 C1) read “An Uptick in Loans Could Aid Businesses.”
This lead reflects the mistaken view that pervades thinking on Wall Street and in Washington D.C. that a major reason for the slow economic recovery is that banks wont lend to (small) creditworthy businesses. This argument is usually advanced by individuals who have never made a loan or had a private sector job. So the argument is that if banks would just make more loans, all would be well. This view is at the core of Treasury and SBA programs designed to provide funds to banks who will promise to lend to small businesses (although the $30 billion being made available to producers of half the private GDP is an insult given the $50 billion tossed at GM which will soon produce a loss of tens of billions to taxpayers on top of the wealth losses of shareholders and bondholders). Already we have forgotten that all the jobs we created by making bad (mortgage) loans are now gone.
“An uptick in the two forms of lending could help businesses expand and reduce employment” says the report, reflecting the view that it is credit supply that is the problem. The banks mentioned in the article are all of the “biggies” who had (and still have) major loan loss problems and did pull away from small business lending. Missing are references to the thousands of community banks who didn’t get caught up in the “bubble” and are the mainstay of lending to Main Street firms. Yes, credit is harder to get now than in the bubble at these banks and it should be. Underwriting standards were seriously compromised and bubble prices overstated the true value of collateral.
But the real problem is loan demand (confirmed while speaking to bank organizations in half a dozen states over the past year). Loans have to be repaid, meaning that the money must be used to finance the acquisition of employees or equipment that will “pay back” the loan. Common sense. But record numbers of owners (as high as 28%) have reported that “weak sales” is their top business problem while only 4% reported “financing” as a top problem (National Federation of Independent Business monthly surveys of its 350,000 member firms). Ninety-three percent reported all their credit needs met in March, including 53 percent who said they were not even interested in a loan. No customers means no need for a loan to finance hiring, inventory purchases or expansion (only survival – not a good bank loan!).
But they don’t get it in Washington D.C. And not understanding the problem produces bad policy, and there has been plenty of that. If lending is picking up, it is because customers are showing up and there is a reason to invest and hire. The reverse doesn’t work – you can’t force feed the credit to owners and have more customers suddenly show up (even interest free loans would have to be repaid!). That’s “pushing on a string”. Just ask the banks.
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May 4th, 2011 at 9:18 am
Alert the media.
Ever since the NFIB started asking them in ’86, business owners have been telling us that finance and interest rates are the *last* thing on their list of business constraints. Dead last. Always. Here’s the historical graph:
http://tinyurl.com/3phknao
Grant Thornton consistently tells us the same thing in their annual survey:
http://www.grantthornton.com/
Meanwhile (NYT June 2010), private equity firms “sit atop an estimated $500 billion. But the deal makers are desperate to find deals worth doing, and the clock is ticking.”
http://www.nytimes.com/2010/06/24/business/24private.html
Meanwhile some more, The Economist manages to share data demonstrating exactly the same thing (this in the midst of the “crisis”), in an article that tries desperately to claim exactly the opposite.
http://www.asymptosis.com/?p=775
It’s enough to make a fellow wonder: how important, really, is the business lubrication provided by Wall Street’s gusher of credit, intermediation, and “liquidity”? Is there far (far!) more than we need, or is good for us? Is the shop-room floor looking awfully slick?
When we hear concerns that businesses won’t be able to *make payroll* because CIT is on the rocks, that shifting their cash flow by two or three months is critical to the well-being of the American economy, does anybody else start thinking “good candidate for creative destruction…”? (Apple seems to be doing…okay, given that they have tens of billions in the bank and no debt. Think they’ll make payroll?)
When CEOs, since the 80s, have gone from being entrepreneurs to arbitragers, practitioners of financial prestidigitation, does anybody else see one likely explanation for the secular decline in growth since then?
And when that flow of credit has gone almost completely *not* to the real economy that produces goods and services with human utility, but rather to the the financial economy,
PDF: http://mpra.ub.uni-muenchen.de/15766/
Does anyone else start to wonder whether this decades-long gusher of credit issued to the financial industry, by the financial industry, is perhaps a detriment, rather than a benefit, to our national well-being?
One word to rule them all: demand.
May 4th, 2011 at 9:41 am
[...] Dunkelburg, chief economist for the National Federation of Independent Business (NFIB) since 1971, tells us what we already [...]
May 4th, 2011 at 11:10 am
An Axiom
The well-being of a social organism (whether a tribe, club or nation) is dependent at root on ONLY these factors:
1. Environmental conditions (accessible resources, the laws of the physical universe and chance)
2. The complex/chaotic interplay of individual and collective decisions of those within the body (decisions of those outside the body are part of the environmental conditions)
Assuming some validity to the idea, and I do… it’s also clear that these are foundations that pre-date the creation of money. (money is a technology not a natural creation which arose to address scaling needs accompanying loss of proximity and growth well-beyond Dunbar Number fuzzy boundaries.)
In fact there is utility in recognizing money as a ‘decision technology’ rather than only as a store of value. And money’s utility was in its capacity to transfer decision (a decision = an idea + an action) from one to another.
Decision Technologies: Currencies and the Social Contract
http://culturalengineer.blogspot.com/2010/07/decision-technologies-currencies-and.html
Now for the at this point very admittedly unsubstantiated hypothesis:
Wealth concentration alone distorts and ultimately destroys the capacity for good decision making by the social body. And thereby reduces the capacity for that social body’s survival.
There are no perfect or ultimate solutions that I know of. (I’m NOT advocating the end of business and enterprise or some idea that income and wealth should be leveled… even hunter-gatherers had some stratification… though NONE to this extent.)
However I’m convinced that addressing some needs in transaction technologies would be helpful… and form a very pragmatic foundation for improving the balance in group decision.
Leveling The Transaction Landscape: Technology and the Campfire
http://culturalengineer.blogspot.com/2011/04/leveling-transaction-landscape.html
I suppose I could be wrong… but somebody had better start contemplating things outside the stale boxes of the dominant political/economic groupthink which is literally thousands of years past its expiration date.
And I am trying to take a pragmatic approach.
May 4th, 2011 at 11:47 am
A friend who works in small business lending (generally sales less than $2o million) at a community bank had the same reaction – they have money to lend. The problem is that their customer base is still scared. Many of these firms had to make drastic cuts to service debt and now that they have deleveraged they are in no rush to bet the company again. Most small business owners have all their net work and assets tied up in the business and if it fails they lose everything (eg most of these small owners have guaranteed their business loans and pledged their homes). And almost every small business owner has competitors or colleagues who can and did lose everything. Most small businesses are by nature optimists, and maybe this wont last forever. But given what they went through the past couple years I’m hard pressed to say that they are acting irrationally either.
May 4th, 2011 at 1:24 pm
[...] It’s all good so long as banks keep on lending. (Money Game, Big Picture) [...]
May 4th, 2011 at 5:13 pm
“But they don’t get it in Washington D.C. And not understanding the problem produces bad policy, and there has been plenty of that.”
You don’t say!
In D.C., they are paid to NOT understand that. Because if they truly understood it, their whole building of lies about how far out important is the financial sector to the American economy would just freaking crumble. It would mean, no TALF, TARP and backdoor bailouts anymore; no more ZIRP, austerity bullshit and all these insane budgetary propositions from the reich wing nut jobs.
Moreover, it would mean that such criminal minds like Prof. Krugman were right (need to stimulate demand first); this alone, is totally unthinkable to the crowd at Clusterstock, Shedlock and other intellectually refined internet venues. And I’m not talking about the other clusters populating the constellation of right wing noise machines, that are so toxic to the sanity of this nation.
Furthermore, negating the Supreme Importance of the financiers, the much deserved worship of Those-Who-Do-God’s-Work could be really bad for political business. One never knows: said upstanding citizens could take umbrage and close the purse. This could only have a negative impact on garnering all these campaign monies that senators, representatives and candidates to the presidency need to keep enjoying the multiples perks of power.
May 4th, 2011 at 5:39 pm
@Francois,
You nailed it! Well said, sir!
Getting that message to the general public, over the constant indoctrination of myriad Fox News and right-wing radio hosts, is what is needed now.
May 5th, 2011 at 10:11 am
Bill Dunkelberg is right on. As a partner in a very small (well, tiny) business that’s approaching its 19th anniversary, I need customers, not loans. In ‘o9 our revenues fell by 50% and, although they have improved since then, they are still considerably off our norm. Many of our vendors, local and national, are also small businesses and are experiencing the same lack-of-sales environment we’re experiencing. Unfortunately, many haven’t survived and many others are on the ropes, all due to the evaporation of their customer base.
Washington — and the WSJ — just don’t get it!
May 16th, 2011 at 1:51 pm
[...] Loan demand is weak, wages are flat, and markets are on a knife-edge. Here’s a clip from The Big Picture: “…the real problem is loan demand (confirmed while speaking to bank organizations in [...]