The View From 1776
Wednesday, March 17, 2010
Bank Lending Reality
Loan demand is not the same thing as the political state demanding that banks lend to business.
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The View from 1776 presents a framework to understand present-day issues from the viewpoint of the colonists who fought for American independence in 1776 and wrote the Constitution in 1787. Knowing and preserving those understandings, what might be called the unwritten constitution of our nation, is vital to preserving constitutional government. Without them, the bare words of the Constitution are just a Rorschach ink-blot that politicians, educators, and judges can interpret to mean anything they wish.
"We have no government armed with the power capable of contending with human passions, unbridled by morality and true religion. Our constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other." John Adams, to the Officers of the First Brigade, Third Division, Massachusetts Militia, October 11, 1798.
Loan demand is not the same thing as the political state demanding that banks lend to business.
Keynesian macroeconomists, who dominate the Obama administration’s economic policies, believe that they can control the entire economy with toggle switches. Click a money switch one way and consumers automatically begin to spend more. Click another switch and banks pour more loans into the economy to support business expansion triggered by the first toggle switch.
In the real world nothing is so simplistic. In hard times people become more prudent and less inclined to gamble with debt.
A recent Forbes article explains what is really happening.
Quote:
Bank loan officers must feel like Marriner Eccles, the Depression-era Federal Reserve chairman who famously equated the Fed’s stimulus efforts with pushing on a string. Bank of America is in its strongest capital position ever (thanks in part to timely assistance from the U.S. Treasury and the Fed’s interest-lowering activities), but customers in its commercial lending division aren’t biting. Loans outstanding dropped steadily all year while commercial deposits rose 24% to $133 billion, says Laura Whitley, the executive in charge of lending to businesses under $5 billion in sales.“As they cut their expenses, they’ve gotten more profitable, and they’re using that cash first, instead of borrowing,” Whitley says. Even the Treasury’s plan to lend $5 billion to parts suppliers against receivables from bankrupt Chrysler and General Motors resulted in only $413 million in loans and will be shut down in April. That doesn’t bode well for the government’s $30 billion plan to stimulate small-business lending, announced in February.
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