Tuesday, February 03, 2009
loan demand continues to fall
far less discussed and far more problematic (the former flowing from the latter, i suspect) is the unprecedented falloff in loan demand. it isn't just that banks are reluctant to lend (though they are); it is that the only people who want to take on new debts are the same people no one wants to see going further into debt. demand for loans of every kind is plummeting as responsible and prudential private parties sensibly shy away from levering themselves into what may well be an deflationary economic disaster.
the media focus on yesterday's fed survey of senior loan officers has been the continuing tightening of bankers' lending standards. but that seems to me to be the lesser problem -- more important is the collapse of loan demand, which is a function of the sea change in consumer psychology brought on by the stunning events of 2008.
this is indicative of why deflationary collapses from high levels of indebtedness can be so very difficult to extricate an economy from. ultimately, the government is relying in its efforts to restore the flow of credit not only on restoring the financial system to some kind of health but also on businesses and individuals to continue to desire the credit the banks might offer them. given the remarkable jump in the american savings rate now evident, this is going to be an extremely difficult proposition.
there is no overstating the incredible extreme of easy credit which current-account-deficit western economies saw circa 2005. it was a dysfunctional condition resulting from a massive multiparty exchange rate manipulation often euphemized as 'vendor finance' which i expect will never return in my lifetime on such a scale, quite possibly in the lifetimes of anyone now living. the distortion of capital flows was enough (in hand with incredible regulatory negligence of western predator states facilitating a fleecing of their publics by an outrageous housing finance construct) to fuel a credit bubble that saw home prices rise to more than double their long-run relation to income nationally -- and in pockets of the most afflicted areas as much as four and five times -- and general indebtedness skyrocket to levels in relation to economic activity unprecedented in the history of western civilization.
this is a situation we neither can return to nor should wish to return to. nevertheless, government response particularly in the current-account-deficit societies in these early stages of the resolution of these imbalances has largely been to attempt to perpetuate the problem -- trying to support asset prices by forcing more debt through the wreckage of the banks onto the scorched earth of household balance sheets, using government guarantees and balance sheet capacity to facilitate as needed. this has failed in part because of the largely-unaddressed collapse of the shadow banking system, in part because of the reluctance of banks to lend, in part because consumers and businesses are rightly afraid to borrow and are instead paying down debts and saving.
there is now developing what the financial times calls an "anti-keynesian" case, referring to niall ferguson's argument in its pages -- though i would be quick to argue that keynes wanted exactly the opposite of perpetuating the global imbalances of the 1920s but instead happened to be speaking from inside of the china of the 1930s. and whereas surplus, creditor nations very likely have ample room but little desire to do so, countries like great britain and the united states cannot -- on the views of ferguson, george soros, saxobank's steen jakobsen and many others -- respond in size sufficient to counter the size of the crisis without encountering what are now widely regarded as remote possibilities -- capital flight, currency collapses and the like. and indeed if one contemplates the government attempting to fund the shadow banking system as well as the banks proper, this does not seem impossible -- jeremy grantham posited that debts in need of eventual resolution may amount to well north of $10tn in light of the collapse of perceived wealth seen so far. and while the government can step into banks and shadow banks to recapitalize, it cannot change the desire of households to get more liquid.
so the ongoing collapse of loan demand marks the failure of the efforts of the federal reserve bank to broadly reinvigorate credit flow, though it has (thankfully) stabilized the financial system for the time being. i don't frankly see how the fed could succeed at any length in such an environment, as it doesn't control household sentiment. deflation remains probable.
in the short 15 years that i have been working i have never seen anything like this. people that i know who have been in the same market for 30+ years are saying the same thing. these are just views from the ground, so this is just a small sampling or taste. one thing is certain american small businesses are in for the fight of their lives over the next several months and ,i'm afraid, years. many will simply end up oob without a thought government intervention. many dreams of many entrepreneurs will die during this time.
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...and I thought gramma and grampa were crazy. lol
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