A question I've often wondered during this recession is -- what will lead us out? With unemployment above 10%, it probably won't be consumers. That leaves business. Yet, some news out from the Federal Reserve makes that hope look a little bit grim as well. In the Fed's "October 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices," trends for banks' credit practices are revealed. In short, credit likely won't be leading us out of the recession either.
The Fed asks senior loan officers various questions in the survey. The one I found the most interesting was how their underwriting requirements have changed over the past three months for commercial and industrial loans. Exactly zero say that they've eased standards. Here are the results for loans to large and middle-market firms and small firms:
Indeed, more than 14% have actually tightened underwriting standards. Here's what this survey's results look like from a more historical standpoint:
Clearly, businesses will find that direction a positive trend, but they probably still don't like that it's well above zero. Moreover, in the past 20 years we haven't seen so steep a climb in tightening credit standards -- and they aren't loosening; they just aren't tightening as much. As long as banks keep clenching their wallets as businesses beg for loans, the recovery will be stunted.
Of course, this news might not be all that surprising. This isn't exactly a healthy time for business, particularly new business. As a result, battered banks aren't crazy about the idea of using their precious capital to bet on seemingly risky business endeavors. With 9% of all commercial real estate loans delinquent, I can't say I really blame them. This piece from Real Time Economics today confirms this attitude -- banks are increasingly choosing Treasury and agency securities over commercial and industrial loans. Check out the graph it includes:
But without credit, how will business drive growth and new employment? The only other option is equity. Investors need to be willing to put cash to work to keep U.S. businesses strong and help it to expand. If the stock market hitting a 52-week high today is any indication, then that's exactly what we're seeing. This investment needs to extend beyond just the stock market, however, and also include smaller and start-up firms.
I've said before that business must lead us out of the recession, but I think these observations make it easy to refine this statement further: equity investment in business must lead us out of the recession. After all neither consumers nor credit appear positioned to be of much help.
What will lead us out of this recession/depression?
That's easy. A change in attitude. That's kind of short, but that sums it up I think. We've grown accustomed to 30% returns in our portfolio, per month. We've become acustomed to homes doubling in value, every two years. We've become accustomed to big fat returns on insignificant investments.
We've become accustomed to higher wages, a growing investment portfolio, increasing property values, cheap and easy credit.
We've become accustomed to being able to get everything we wanted on a whim and a Mastercard.
We've got to change that, and expect slower growth in wages and our investments. To learn to live within our means. To use credit wisely.
I expect growth in my business this next year, but I expect it to be small. Inherent in that expectation is the reality to spend small, to watch my expenses closely. Not that I'm cutting back, but I'm not blowing it out either. I'm not going to "jump start" the economy by going into deeper debt than I may already have.
If everyone else sets their sights accordingly, the economy will continue on. It won't die for sure. And growth will be there, but slower, smaller.
Daniel,
Could you explain how a company's stock price increase translates into more capital for the company? I would think this is only true for companies which hold a lot of their own stock and the price increase would only benefit them if they sold.
Brian
Right, that's part of the assumption, as I think many companies have equity in their corporate treasuries. A stronger equity market also makes subsequent equity offerings much easier, which a number of firms (particularly banks) have taken advantage of.
But when I say equity might lead the recovery, I mean moreso new equity. If equity markets are strong, in general, that should also lead to additional equity investment. It is also made easier by the stock market doing better because investors have more wealth to spend elsewhere.
I think you all are terribly out of touch. Our mid sized commercial construction company is being beaten down by the inability of our equity rich clients to finish and secure construction loans. We have conservative clients that specialize in upgrading existing real estate that have been major players in the Twin Cities retail market for a half a century. The equity they have in their holdings would be enviable to anyone, especially a bank, yet they are being saddled with new requirements that have led them to several different banks and delayed two projects for at least a year. This is not an isolated incident, but a trend that has plagued every major construction company in the Twin Cities. Established Entrepeneurs want to invest and build but can't get the money! As a taxpayer I am furious that the trillions our federal government has pledged to enable the banking industry to sidestep this recession is not acting as a stimuls to spur investment, construction and economic growth. Something is very wrong here. No, banking will not lead us out of this recession. Consumers obviously are not in a position to help out as they have been ignored by recovery efforts. The financial sector may parlay the bailout funds into short term profits that enrich their executives but eventually this house of cards and developing ponzi scheme allowed to replay itself one more time will collapse of its own weight without a structural base to support it.