Across the media I keep seeing the discussion going back and forth about who or what is the culprit for tight business credit and a continuing sluggish rate of economic growth. Depending on the guru you tune into, the average projected 2011 growth of the Gross National Product is only about 3%, meaning that new job growth will remain lethargic for the foreseeable future. At that pace, it may take 15+ years to return to the same employment level enjoyed prior to the housing bubble.
So where is the money to fuel a more robust economy? Let’s look at all the players in that cycle:
Banks – major banking companies have returned back larger and financially stronger thanks to a lop-sided injection of capital (courtesy of the U.S. taxpayers) to avoid the abyss. The market laggards (Wachovia, WaMu, Lehman Bros. et al) are all gone, meaning less competition for the survivors.
Smaller community banks, who didn’t get the benefit of federal intervention, remain a mixed bag, with many still suffering from weak capital, and many just being thankful to be alive. There are many bank closings ahead, as unaccounted real estate losses surface. But there are also many well capitalized community banks that are beginning to buy up weaker ones.
Why aren’t the banks lending? Many are lending, and the question should be who are they lending to? Across the market, risk parameters were dramatically lowered during the crisis and have remained very low. Remember it was inflated real estate values that got us into the mess, and banks aren’t falling into that trap again anytime soon.
Business – many small businesses aren’t borrowing because they don’t want to borrow. Many of their own revenues have been muted since the crisis, and without seeing demand appear first, they are smart enough to avoid leveraging themselves up just to fail.
Most of the business complaints I hear are people who need funds to cover a prior period loss, so they can sustain the business they have. That money is not coming from a bank. They need equity, and most are trapped in a business that is not fundable by typical investors.
Regulators – my observations are that the bank regulators have not made credit restoration an easy task. Blamed for not doing enough to prevent the last crisis, they are still making life hell for many banks in the field. This may be contrary to what the policy makers promise or describe, but ask your local banker.
Consumers – Another missing element in economic growth are consumers. With almost 9% unemployment, many employed persons are still hesitant to live the good life, and have modified their good life ways. While many restaurants in my neighborhood have closed, many folks are still eating out. But speaking with restaurant owners, I learned that their average tickets are down 15%-25%, as fewer expensive wines are sold, desserts are skipped, and beer is substituting for more pricey cocktails.
New auto sales are still slow as consumers drive the old car a few more months (or years), and home remodeling is still in vogue rather than buying up for a new house. Seems like the loss of residential inflation has trapped many in the old home (often upside down), and taken away the source of funds for larger homes and new furniture buying.
Like everything else in life, this scenario is a cycle, and it will cycle out and upward at some time. How soon, how far, and when the cycle moves upward will depend on confidence that is restored among every market participant.
So how about you, feeling lucky?