Fed Governor Elizabeth Duke
The second round of the Fed's extraordinary quantitative easing (QE2) is soon coming to an end, and with that $600 billion of support to the financial system. One of the stated objectives all along has been to get credit flowing back to businesses, but the numbers show that the recovery has not been only jobless, but loanless as well: lending to business has been slipping since the end of the recovery, although the Fed is saying things are coming around.
Fed Governor Elizabeth Duke spoke to the 2011 International Factoring Association Conference two weeks ago, and commented that loans to business are improving:
Credit markets normally recover slowly following financial crises, and the most recent episode was no exception. However, after declining throughout 2009 and much of 2010, recent measures of aggregate credit outstanding have shown some signs of improvement. Nonrevolving consumer credit outstanding, which includes auto and student lending, has increased for the past seven months. Issuance of corporate bonds has been robust for several quarters, and new issuance of commercial mortgage-backed securities picked up in the first quarter of 2011, albeit from very low levels. Commercial and industrial (C&I) loans outstanding have resumed growing modestly on average.Modest, indeed. This graph shows the Fed's weekly report on bank loans and leases, for the past few recessions, indexed to 100 at the end of the downturn. For the recessions ending in 1980 and 2001, lending picked up right away, and grew steadily three years into recovery. (There's a very large jump in March 2010 which never looked quite right, but hasn't been adjusted.)
Looking back to earlier recoveries, loan growth was delayed in 1991, when there was a financial crisis -- that was the savings and loan disaster, which is small potatoes compared to what we have just been through. Total lending was flat for two years.
I got the idea for this graph from one that we see in The New York Times now and then, comparing the number of jobs to the previous peak:
But what about small business lending? Back to Governor Duke:
Small businesses are central to creating jobs and to restoring our economic prosperity. The economic importance of small businesses is due in part to the fact that about one-half of all Americans are employed by firms with fewer than 500 employees.Small firms also create lots of jobs, but are more likely to lose them as well. Unfortunately, the government's monthly statistics do not provide the large and small breakdown; we have to wait years to know that with any precision.
But a lack of lending by banks is probably not what is holding back small businesses. Governor Duke goes on to cite a recent Fed study that shows that nearly all new businesses are funded with the owners' personal savings, or that of "friends and family." Few actually get loans from banks, and personal wealth is therefore very important.
Indeed, a bit less than 80 percent of small business owner survey respondents with fewer than 500 employees indicated that they had not even applied for business loans in the past five years. This is not to say that loans are not important -- far from it -- but that for a broad range of businesses, personal finances may be the determining factor in starting a business, and personal finances may also be most important in sustaining the health of a business once started.Instead, the bank loans go to larger businesses go to medium and large companies. I don't see any growth in the numbers, but Governor Duke points out that lending officers at banks are seeing greater demand from larger banks, and a greater willingness to lend:
In the [Fed's] most recent [Senior Loan Officer Opinion Survey], the net percentage of respondents reporting higher loan demand by large and medium-sized firms rose above 20 percent for the first time since 2005. That said, banks report that loan demand from smaller firms remains fairly weak. Only a small net percentage of banks reported stronger demand from such firms.The bottom line is this -- the massive push of monetary policy through QE 1and QE2 did not make it through the system to provide additional credit to businesses. As for small businesses, it's questionable whether it is reasonable to expect there would be a benefit to small businesses, in the form of easier lending, since it appears they don't use bank loans much anyway.
So QE2 didn't really help the housing sector, and didn't make its way into business loans. But it did help the stock market. At least that makes everyone feel better, and maybe gives business owners some of the confidence they need to venture out and expand and hire more people. Let's hope the withdrawal of QE2 isn't too much of a shock to the real economy.