Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of new jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession.
The combined value of two key sources of credit – outstanding commercial and industrial bank loans, and short-term loans known as commercial paper – peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.
Not once in the years since the Fed began tracking such numbers in 1973 have these arteries of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975.
“This is a very big deal,” said Andrew Tilton, a senior economist in the U.S. Economic Research Group at Goldman Sachs. “You’re basically crimping the growth of the more vulnerable companies. If they can’t borrow the money, their options are much more limited. They’d have to have less ambitious hiring plans, buy less machinery and cancel projects.”
[i]”You’re basically crimping the growth of the more vulnerable companies.”[/i]
That’s not a bad thing. The real problem with easy credit is that it enables poor capital allocation, both within individual business and within the economy as a whole. Such malinvestments are a monumental waste, generate excess capacity, and undermine the profitability of more cautious companies.
The same could be said of personal debt. Easy credit allowed many people to get into much more home than they could afford. These individual and systemic malinvestments [i]must[/i] be burned away periodically, lest so much dead wood accumulate that some otherwise-innocent spark trigger a conflagration.
There is so much more that could be said, but it can be summarised, thus: [b]Business should expand, not to [i]become[/i] profitable, but because it [i]IS[/i] profitable.[/b] Keeping vulnerable companies alive rewards weak management and creates subsidised competition for the well-managed ones.
Me? I’m hoping for a generation with so much deflation that people remain debt-averse for the rest of the century.
The credit squeeze can and does lead to unscrupulous conduct by bankers in their desire to stop a project well in the the works. I know. Without going into too much specifics my banker asked me to fire the current contractor and hire their preferred contractor ( who happens to be on the board of the bank) . In order to do this I will incur 700,000 in increased expenses because of the hiring of the new contractor. I first have to pay the new contractor before the bank will continue to fund the expansion. I know that between the lines the bank is in trouble and can’t meet their obligation. So, change the rules in the middle if the game. I have a very lucrative medical practice that is growing very well. But the existence of zero interest mortgages that were doled out right and left has now left many a bank holding foreclosed homes. So they punish the businessman. Is it it fair? You be the Judge. I currently have 5 contractors who have bills they want paid but the bank is resisting.
Stew