A pittance, with No Appetite

Crowding lenders and borrowers are wary explain a decline in lending in the United States.

The worst times for the U.S. financial markets may be left behind, but the markets are still abnormal. Bill Dudley (Bill Dudley), head of the Federal Reserve of New York, aptly picked up these sentiments in a recent speech, bluntly called “a little better, but very far from the best.” In a survey published this week, members of the National Association for Business Economics said that the markets will continue to hamper economic growth at least until mid-2010.

The main question for many is to be seen whether the lack of credit as a deterrent to the nascent U.S. recovery. As a sign of facilitation can be called a marked decrease in the use of special funds for the Federal Reserve to maintain liquidity and the central bank gradually nullified their purchases of assets. Securitization markets expands, approaching pre-crisis level of debt on credit cards and auto loans, but so far no improvement relate to the mortgage sector, which, as always, depends on public support.

Simultaneously, the total amount of credit falls. Bank lending expanded in the midst of the crisis, as the company beat the credit for a pre-agreed lines. But since then, volumes have fallen from $ 7.14 trillion. in May to $ 6.78 trillion. in September, with accelerating further decline in recent years. This decline is the reluctance to extend credit, or take them?

And in fact, and in the other. While credit losses rising, banks do not want to scatter money. However, some large banks have restored their position, largely due to robust capital markets. JPMorgan Chase said on Wednesday, 14 October, on a profit of $ 3.6 billion in the third quarter, a growth of nearly 7-fold compared with the same period in 2008. Others, including the still very shaky Citigroup, must submit reports in the near future. But smaller banks, in particular, continues unabated fears of loans granted to commercial facilities and construction, which, according to brokerage CLSA, they had to give about $ 1.5 trillion.

Last July the Fed survey of bank loan officers showed that the past continues to tighten security standards for all categories. At the same time, they have a record level of reserves stored in the Fed. Even those banks that are in good condition, may want to stay in the middle position because of the uncertainty regarding the requirements for capital and cover the accounting rules for off-balance sheet assets.

But the companies also try to take fewer credits, because they think twice before you lease or invest in the purchase of equipment. Demand for commercial and industrial “loans has fallen every quarter since mid-2006, according to a poll of creditors.

Such a synchronous decrease in demand and supply becomes visible in consumer lending. Annual rate of decline in August was 5.8%, which was the seventh consecutive month of decline, and the reduction could be even stronger if not for the imposition of “cash for old cars.” Creditors rolled back, mainly because of the “revolving credit, such as credit cards, where they have more opportunities for reductions. In the past two years, lines of credit cards fell by $ 1.25 trillion. And the other $ 1.5 trillion. disappear by the end of 2010, as suggested by the analyst Meridit Whitney (Meredith Whitney.)

But borrowers also did not want to deal with credit. Overloaded households now save more and reduce the debt load, adjusting to the shock of knowing that the value of their assets fell by $ 11 trillion. Balance sheets need to be amended, but the consequences will be painful. Weak demand from consumers, whose spending accounts for two thirds of the economy – is the main obstacle, which will face the economy. Given that household debt is still at 120% of disposable income, reducing the leverage may continue for some time. Value above 100%, as a rule, is considered unacceptable. Rosenberg, David (David Rosenberg) from the investment firm Gluskin Sheff, argues that the United States are in the middle of the outstanding changes in consumer behavior with regard to loans and discretionary spending, and this is reflected in bond yields. What is typical: consumers reduce their debts, despite the fact that the tax program encourage them to do more shopping. Consumer spending in August was 1.3%.

Nevertheless, part of the economy can be seen in the ongoing credit crunch. Take corporate finance. Large public companies once again have relatively easy access to credit. Issue of corporate bonds shall, in accordance with a plan to rewrite the records this year, largely offsetting the fall in bank lending. “For the investment companies is almost as much as you can eat”, – said Charles Himmelberg (Charles Himmelberg) from Goldman Sachs.

But only a quarter of registered companies in the United States could withdraw the bond market. Below them there are lots of small and medium-sized firms, which together employ 52% of employed U.S. population, and these firms are heavily dependent on banks. Ms. Whitney believes that small business owners are the primary users of credit cards and lines of its own capital, and now they face a serious credit crunch as these credit supports were dramatically upside down. We borrow much more complicated than it was at any other time since the early 1980’s. Studies show that loans will be even more rare.

The same case is hardly helps that CIT – one of the largest creditors of small businesses in the U.S., ran aground. Since the company seems to go into bankruptcy, Jeff Peak (Jeff Peek) said Oct. 13 that at the end of the year he retires. And while corporate small fish could not count on substantial support from the taxpayers. During the year to September, only $ 9.3 billion of loans guaranteed by the Office for small businesses (government organization), although the pace only increased.

Not everyone thinks that the loans so very limited. Small business is hampered not so much the lack of credit, as lack of customers, says Bill Dankenbelrg (Bill Dunkelberg), chief economist at trade group National Federation of Independent Business (NFIB). In the latest study, NFIB, conducted in September among its members, only 4% see their main problem in the financing, the very same big problem according to 32% of respondents were weak sales. With this level of uncertainty on investment plans are at lowest level in 35 years. “Try to get loans, only those who are struggling to stay in business, not those who seek to develop it,” – said Mr. Dankenbelrg.

He may be right, but when the recovery will seem more confident the company will again be applying for loans to increase inventory and buy new equipment. Mr. Dankenbelrg think that banks would be willing to help them. Others believe much less. Given that credit losses were unlikely to reach its peak point in 2010, and banks will continue to be broke, at least until 2011, this credit crunch may be yet to come.

Slim pickings, no appetite
The Economist
October 14