Wednesday, May 4, 2011
It's Demand, Stupid... For Houses, Consumer Goods, Cars... And Loans
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..
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!).
---William Dunkelberg via Ritholtz