A headline in the Wall Street Journal (4/24 C1) read "An Uptick in Loans Could Aid Businesses". This lead reflects the mistaken view pervading thinking on Wall Street and in Washington D.C. that a major reason for the slow economic recovery is that banks will not lend to (small) credit-worthy businesses. This argument is usually advanced by individuals who have never made a loan or had a private sector job. 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 these producers of half the private GDP is an insult, compared to the $50 billion tossed at GM which will soon produce a loss of tens of billions to taxpayers, share-holders, and bond-holders). We have forgotten already that all the jobs created by making bad mortgage loans are now gone.
"An uptick in...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 pulled away from small business lending. Missing in the report are references to the thousands of community banks who did not get caught up in the "bubble" and are the mainstay of lending to Main Street firms. Yes, credit is harder to get now at these banks than it was during the bubble, and it should be. Underwriting standards were seriously compromised, and bubble prices overstated the true value of collateral.
That the real problem is loan demand was 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. This is common sense. But a record numbers of owners - as high as twenty-eight percent - have reported that "weak sales" is their top business problem, while only four percent have reported "financing" as the top problem (according to the 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 fifty-three percent who said they were not even interested in a loan. Without customers, there is no need for a loan to finance hiring, inventory purchases, or expansion. Mere survival is not a good bank loan! But those in Washington D.C. do not get it. This lack of understanding produces bad policy, and there has been plenty of that. If lending is picking up, it is because there are customers, and thus a reason to invest and hire. The reverse doesn't work - credit cannot be force-fed to the owners to cause more customers suddenly to show up. Even interest free loans have to be repaid! This is "pushing on a string". Just ask the banks.
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