There is a pickup in bank lending, but I remain skeptical about the recovery. I do not see a collapse ensuring, I just am not yet nearly convinced that the recovery will quickly strengthen.
First there is a difference between the reactions from Wall Street and Main Street. Wall Street has the preferred option to raise capital from issuing stock, a form of capital that requires no interest payment and that theoretically never has to be repaid. Furthermore lines of credit are available to Wall Street at much lower costs. Wall Street is benefitting from very flat labor costs and very low interest rates. Wall Street is also benefitting from the lack of competitive alternatives to cash. There may be a significant correction, but stocks will likely benefit from the fact that there are relatively few other places to place cash for any return.
Main Street could also benefit from lower interest costs except that relatively few of them could qualify for a loan. Partially because of poor operating financials and partially because of the decreased collateral from lower home prices, and partially from stricter lending standards in the wake of the banking collapse, it was hard for many Main Street borrowers to qualify for a loan. Banks lend for growth, not liquidity for survival.
Recently, more borrowers were able to qualify for bank loans. Part of this is the return of some equity value in their homes and part of this was an intentional delay in replacing capital equipment. In the initial phases of the collapse a small business could look ahead, see a poor risk reward proposal and simply decide to close up and retire early, or downsize considerably. Picture a machine shop owner of 40 years with twenty welders and machinists who see his customer base decimated in 2009. He closes up and liquidates his equipment. He is not likely to return to business when the market picks up. And the rate of new startup to replace him is zero, because there is little business for them as well.
The public companies and the larger private companies do not have this option. They cannot close shop. They cut costs as much as they can, including payroll, and run their trucks and equipment a few years longer than they used to. They finally have to replace inventory and equipment. They are the stronger of the Main Street Companies and they now approach the bank to borrow. They are able to qualify for a loan.
That sounds great, but if the reason for this loan pickup is to replace exhausted equipment, and not for future growth, then this is a dead count bounce, not the beginning of sustained growth. This is my gut and my reading of the small business landscape, but we will know in a few months.
The economy faces a significant headwind from the disastrous fiscal policies, led by Obamacare (sorry Nancy), but we have had the Fed to cover for past fiscal missteps with a printing press. The impact was neutralized by individuals reducing debt and spending, and cuts in state spending, and an overall reduction in the velocity of the money circulating in the economy. They made new cheap money nobody wanted. This is probably fueling Wall Street. This liquidity clearly muted the downside of this cycle, but did not propel a strong recovery. Low interest hurt savers but inflation stayed in check.
While this liquidity has kept this skeptical economy afloat, after years of this we have to face the point where this liquidity may be judiciously pulled from an economy that is still barely recovering. Can this be done without pushing us back into a recession? This is the hardest task the Fed faces. Bernanke’s genius may become Yellin’s headache.