Tuesday, August 12, 2008

Banks Increase Lending Standards Across The Board

credit card signThe July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices released by the Federal Reserve describes a lending environment that has gotten worse across the board. I won’t bore you with all the details; feel free to click on the above link if you want those (or you can read Mish’s blog post--he does a great job of summing up this report), but I do want to make the point that these numbers are not encouraging. Sure, residential lending standards have increased--I think most people understand that-- but we need to realize that this credit tightening is not confined to just residential real estate. Banks are hesitant to lend to pretty much everyone right now. That includes businesses loans, commercial real estate loans and consumer loans.

Our economy is driven by lending and borrowing--it has to be because we don’t have any savings. It is pretty safe to say that if Americans started buying only what they could afford our economy would collapse. In order to stay afloat, we have to keep borrowing; it is the only way to keep the train chugging in the short term (which is all the government cares about, but I’m not going to get into that). That being said, when lending becomes tighter, our economy pays the price. Borrowed money is our lifeblood, and right now the flow is being restricted. The Fed is trying to do their part by making the money cheaper and more abundant, but unless banks start actually lending out this money, it isn’t going to do them much good.

While lending is the lifeblood of our economy I should also add that it most definitely is toxic. We need to understand that we cannot go on borrowing more money forever. Right now the U.S. economy is acting more or less like a ponzi scheme. Basically that means that they are taking money from investors and the only way to pay these investors back is by bringing on more investors. As long as there is a steady stream of new investors coming in with their money then there are no problems. However, if anything happens to restrict the supply of new investors so that the money they bring in doesn’t cover the payments due to the old investors, then all hell breaks loose. The U.S. government obviously has the trump card in that they can print money at their whim, but we all know where that leads.

Those who want to know more about the U.S.’s addiction to borrowing should check out the new movie I.O.U.S.A. I don’t imagine that the Fed will take these tightening lending standards lying down, though; it will be interesting, to say the least, to see what they come up with to combat them next. They say that inflation is an overriding concern right now, but that shouldn’t keep them contained for too long. The thing investors need to remember is that this party can’t and won’t go on forever. They can drag it out, but at some point people will start heading for the doors.

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