Banks In Search Of Borrowers?
Lost in all the news from Pakistan is the quarterly survey of bank lending activity released by the Fed. I usually don’t discuss this rather short and dull document, but today it is worth a brief note.
American banks have ramped up their willingness to lend to its highest level in seventeen years. Yes: seventeen years. So, just a few quarters removed from the big bust they caused, the banks are out peddling loans and reducing credit standards in order to attract business. Easier terms are available across the country for both auto loans and credit cards. The problem is that the banks did such a thorough job trashing the average household that demand for credit isn’t matching the bank’s willingness to lend. Demand for auto loans did creep up a bit in the first quarter, but demand for credit card borrowing is relatively static, and demand for mortgages continues to fall.
Evidently the banks misbehavior has left a sour taste in the mouths of consumers who are still struggling to overcome the twin burdens of paying down old debt and paying regular expenses in the face of stagnant wages.
Meanwhile the banks are also loosening credit standards for business as well. This is the sixth straight quarter during which banks have tried to expand corporate lending. There are signs that larger businesses are biting. But smaller businesses seem hunkered down and are unwilling to borrow.
The picture that emerges from this, at least in my mind, is one of severely depleted aggregate demand in that face of which no amount of supply side tinkering will work. Consumers are still keeping a tight rein on expenditure, paying down existing debt, and are generally skeptical of taking on new debt. They lack both the means and the confidence to provide the banks with the demand that our fearless and oft time reckless financiers need in order to boost revenues. This picture is reflected on the corporate side too. Small business is still avoiding expansion: they simply refuse to believe in the recovery since so little of it has trickled down to them. It seems that neither consumers nor small business are carried away by the hype of our recovery. Nor should they be. So far it has been one of profit bolstering rather than wage increases. As long as it stays that way the cash needed to provide the impetus for a good strong and broad based recovery will not flow. And without that things will bog down quickly.
The likely outcome from this is twofold: banks will have to reduce credit standards more to generate sufficient response from potential borrowers; and, if demand fails to increase significantly, the banks will retreat to more gambling in order to generate profits. Neither of these are harbingers of a stable future for banking. So think of the next round of bank problems as aftershocks from the great disaster of 2008. That instability is in the process of begetting the next instability.
Who said that the banking system was fixed?
Not me.
