Many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth, even as the country tentatively rises from its recessionary depths.
Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board. The enduring credit squeeze appears to reflect an aversion to risk among lenders confronting great uncertainty about the economy rather than any lingering effects of the panic that gripped financial markets last fall, after the collapse of the investment banking giant Lehman Brothers.
Bankers worry about the extent of losses on credit card businesses as high unemployment sends cardholders into trouble. They are also reckoning with anticipated failures in commercial real estate. Until the scope of these losses is known, many lenders are inclined to hang on to their dollars rather than risk them on loans to businesses in a weak economy, say economists and financial industry executives.
“The banks are just deathly afraid,” said Sam Thacker, a partner at Business Finance Solutions in Austin, Tex., which helps small businesses line up financing. “I don’t see commercial banks coming back to the market anytime soon.” In the long view, tighter loan standards seem healthy after a terrible crisis attributed in part to years of recklessly lenient lending.
One key part of the problem that’s not been discussed is the underwriters: the people in the central office who decide on whether or not a loan is to be made. You’d imagine such a position would be occupied by people with a certain amount of grey hair and an awful lot of experience.
Instead, the typical underwriter is a 28-year-old with an MBA in finance he picked up four years ago at the local state college. Starting a year ago his overwhelming motivation became fear of making a mistake, which is really fear of losing his job, which he desperately wants to keep, because if he doesn’t, how will he make the payments on that red Camaro …
Therefore, even long-term profitable businesses like mine get starved for ordinary operating funds. What do we do? Cutting back on labor is a big one. Small business has typically made up for those jobs that vanish from old-line big business.
Not this time, folks. Not until successful small businesses can return to something like normal cash flow financing, and that won’t happen as long as the government runs gargantuan deficits for political purposes. Funding government boondoggles is currently sucking up dollars that used to go towards productive activity.
Bart, I am reminded of the “Yes, Minister” episode in which a hospital functioned quite normally. The government administrators and staff were fully employed administering the hospital except the hospital had no patients. The administrators argued that complying with government paperwork kept them quite busy and they had the lowest death rate of any hospital in the UK.
Glad to see another Yes Minister aficionado, Br. Michael.