In order for an economy to grow, access to the capital markets is essential. In the mid-2000's, banks were tripping all over themselves to lend money to anyone for any half-cocked reason. The penduluum has swung to the other side. Bank lending standards have become so tight that they are certain to choke off hope of an economic recovery.
David Rosenberg from Gluskin Sheff said lending has fallen by over $100 billion since January, plummeting at an annual rate of 16%! “Since the credit crisis began, $740 billion of bank credit has evaporated. This is a record 10% decline,” (http://canadafreepress.com/index.php/article/20164).
Mr. Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature.”
So far, this year alone, U.S. bank-lending has fallen by over $100 billion – from the extremely depressed levels of 2008. Thus, not only is U.S. bank-lending falling at the fastest rate in history, but it is doing so from a level which was already far lower than bank-lending before Wall Street destroyed the U.S. economy. So what else is new?
The problem is not soley the result of bank stinginess. As the result of the banks' profligacy in the mid-2000s, new regulations have drastically tightened lending standards, thus precluding loans that might have been made otherwise. In addition, credit demand has plummeted.
An important question is "to what extent is the decline due to tightened lending standards rather than falling demand?" Demand shortfalls may be a key component at this point; while the National Federal of Independent Business continues to warn of tight credit conditions. Its latest discussion of small business conditions indicated that the biggest problem facing small employers is a "shortage of customers".
Without a functional and vibrant credit market, no economic recovery is possible. In fact, the latest trends point to an imminent second dip in the "Double-Dip Hyper-Inflationary Depression".
Unfortunately, the unavailabity of credit for small business is the most significant aspect. Small business, especially those companies under 100 employees, have proven to be the engine of growth. By cutting off their lifeblood, ongoing high unemployment is assured. And, as a result, we can expect absolutely NO economic recovery.
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