In a turn that no one could have expected, the banking community is in such a tight credit fix that even companies with near-perfect credit cannot get loans.
As one small company borrower told The New York Times, "This is going to slow down the American economy.”
Bank credit is now declining at an annualized pace of more than 6 percent. The Times calculates "That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity."
The news further calls into question the actions of the Fed which has given hundreds of billions of dollars in cheap loans to major backs and cut interest rates to make it easier for them to borrow. As it turns out, virtually none of this is making it back out of the banks in the form of corporate loans.
The domino effect could be tremendous, and economically dangerous. A lack of funds to credit-worthy business will almost certainly shut down expansion and capital spending. The is likely to kill job growth in a number industries which have not been as hard hit as banks, airlines, and auto companies.
In other words, the government is allowing banks to dig a hole for the balance of the economy, and the results of that are likely to be seen in GDP and employment figures in the second half and probably well into next year.
Douglas A. McIntyre
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