There have been quite a few anecdotes about a new tough-mindedness among banks, and it is finally showing up in the data. From the New York Times:
Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001….
“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”…
But if the newfound caution of American banks is prudent in the long run, the immediate impact is amplifying the troubles with the economy. The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity.
The financial system is not going along: As banks hold on to their dollars, mortgage rates are climbing. So are borrowing costs for corporations.
Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.
The Times seems perplexed with this pattern, which is odd. This is perfectly standard bank behavior when credit losses start to pile up. Just as they were overly lax in the boom times, they become overly stringent in the downturn. And the new stinginess can show up in rates, credit availability,or both. In the dot-bomb era, which was a mild tightening from a credit perspective, rates stayed favorable but loans become more difficult to obtain.
The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity.
Ah, I vaguely remember the days when the Fed changed interest rates. Sometimes they would move up, and sometimes they would move down. We’d play silly games with a “bias”. It was good, clean fun.
Then the liquidity trap hit. Now we get “liquidity injections,” bizarre regulations and insane legislation, with discount windows for all.
Push a little harder on that string, boys! It’ll move any… moment… now!
Access to capital and credit is essential to growth IN A CREDIT ADDICTED ECONOMY. If that access is restrained or blocked, the economic system takes a hit.
Retail trade group predicts many store closures
Susan Valot: Levitz, Linens ‘n Things, Shoe Pavilion… Those are just a few of the store chains that have declared bankruptcy over the past few months. Mervyn’s reportedly may be next in line. And other chains, like Home Depot, JoAnn’s, Gap, and Old Navy, have opted to close stores in order to tighten their purse straps.
The International Council of Shopping Centers predicts 144,000 stores will close nationwide before the end of this year. That’s up 7 percent from last year. It’s the largest year-to-year jump since the group started keeping records of such things 14 years ago. But the council points out the overall number is still fewer than the average number of closings between 1993 and 2001… a sign, it says, that the retail industry is better prepared to weather economic storms.
As of April, there were about 217 U.S. outlet centers totaling 57 million square feet of space, where about 305 outlet chains operate 11,546 stores, according to Value Retail News, published by the International Council of Shopping Centers.
I suppose most of the 3 pc decline comes from the commercial paper market and here it is again the ABS-CP market that is mostly impacted. Nothing new and surprising there. According to data from the Federal Reserve Bank of St. Louis Commercial and Industrial loans have actually increased from about $150 billion per month to $ 250 billion per month in the second half of 2007. Businesses obviously have tapped their credit lines when they abandoned short terem funding sources. Banks are not cutting back on business lending yet, as long as they are able to successfully recapitalize.
It’s going to get worse before it gets better. As you know, 70% of our economy is based on consumer spending, that is you and I buying stuff from each other. Now, that the home ATM machine is closed and consumers are tightening their belts and behaving more cautiously it’s likely the economic contraction will be severe. Levy Institute has an interesting report on the effects of the closed Home ATM Machine you can print and read
The problems at Mervyns Dept store are a sign of challenging times ahead.