Loan Demand, Not Credit, Is the Problem

WILLIAM DUNKELBERG has been Chief Economist for the National Federation of Independent Business (NFIB) since 1971. He is a Professor of Economics at the School of Business and Management, Temple University, where he served as Dean from 1987 through 1994 and as Director of the Center for the Advancement and Study of Entrepreneurship.

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A headline in the Wall Street Journal (4/24 C1) read “An Uptick in Loans Could Aid Businesses.”

This lead reflects the mistaken view that pervades thinking on Wall Street and in Washington D.C. that a major reason for the slow economic recovery is that banks wont lend to (small) creditworthy businesses. This argument is usually advanced by individuals who have never made a loan or had a private sector job. So the argument is that if banks would just make more loans, all would be well. This view is at the core of Treasury and SBA programs designed to provide funds to banks who will promise to lend to small businesses (although the $30 billion being made available to producers of half the private GDP is an insult given the $50 billion tossed at GM which will soon produce a loss of tens of billions to taxpayers on top of the wealth losses of shareholders and bondholders). Already we have forgotten that all the jobs we created by making bad (mortgage) loans are now gone.

“An uptick in the two forms of lending could help businesses expand and reduce employment” says the report, reflecting the view that it is credit supply that is the problem. The banks mentioned in the article are all of the “biggies” who had (and still have) major loan loss problems and did pull away from small business lending. Missing are references to the thousands of community banks who didn’t get caught up in the “bubble” and are the mainstay of lending to Main Street firms. Yes, credit is harder to get now than in the bubble at these banks and it should be. Underwriting standards were seriously compromised and bubble prices overstated the true value of collateral.

But the real problem is loan demand (confirmed while speaking to bank organizations in half a dozen states over the past year). Loans have to be repaid, meaning that the money must be used to finance the acquisition of employees or equipment that will “pay back” the loan. Common sense. But record numbers of owners (as high as 28%) have reported that “weak sales” is their top business problem while only 4% reported “financing” as a top problem (National Federation of Independent Business monthly surveys of its 350,000 member firms). Ninety-three percent reported all their credit needs met in March, including 53 percent who said they were not even interested in a loan. No customers means no need for a loan to finance hiring, inventory purchases or expansion (only survival – not a good bank loan!).

But they don’t get it in Washington D.C. And not understanding the problem produces bad policy, and there has been plenty of that. If lending is picking up, it is because customers are showing up and there is a reason to invest and hire. The reverse doesn’t work – you can’t force feed the credit to owners and have more customers suddenly show up (even interest free loans would have to be repaid!). That’s “pushing on a string”. Just ask the banks.