Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
DOUBLE YOUR DONATION!
We don’t run corporate ads. We don’t shake our readers down for money every month or every quarter like some other sites out there. We provide our site for free to all, but the bandwidth we pay to do so doesn’t come cheap. A generous donor is matching all donations of $100 or more! So please donate now to double your punch!
FacebookTwitterGoogle+RedditEmail

Lending and the Big Banks

One of the big myths of the current downturn is that the reason the slump persists is that banks are refusing to lend. The story goes that because the banks have taken such big hits to their capital as a result of the collapse of the housing bubble and record default rates; they no longer have the money to lend to small and mid-size businesses.

We then get the story about how small businesses are the engine of job creation, creating most new jobs. Therefore if they can’t get capital, we can’t expect to see robust job growth.

This story of banks not lending is used to justify all sorts of special policies to help out small businesses and banks. In fact, the Obama Administration has plans to make a special $30 billion slush fund available to banks if they promise to lend it out to small businesses.

In reality, every part of this argument is completely wrong. First, small businesses are not special engines of job growth. Small businesses do create most new jobs, but they also lose most new jobs. Half of new businesses go under within four years after being started. Jobs do get created when the businesses start, but jobs are lost when the businesses fail.

The reality is that businesses of all sizes create jobs. There is no special reason to favor small businesses in promoting job creation. We should favor businesses that create good-paying jobs with good benefits and conditions, regardless of their size.

The other parts of this story make even less sense. Let’s hypothesize that many banks are crippled in their ability to lend because of the large hits to their balance sheets from bad mortgage debt. Well, not all banks got themselves over their heads with bad mortgages. There are banks with relatively clean balance sheets.

If it were the case that a substantial portion of banks are now unable to issue many new loans because of their inadequate capital, we would expect to see the healthy banks rushing in to fill the lending gap. There should be accounts of dynamic banks that are taking advantage of this once-in-a-lifetime opportunity and rapidly gaining market share.

While this may be happening, there certainly have not been many accounts in the media of banks that fit this description. In other words, it does not appear to be the view among banks, including those with plenty of capital, that there are many good potential customers who are unable to borrow money.

The other missing part of the story has to do with the nature of competition between small firms and their larger competitors. We know that large firms have no difficulty attracting capital at present. They can issue bonds at near-record low interest rates. They can also borrow short-term money at extraordinarily low interest rates in the commercial paper market.

If small and mid-size companies were being prevented from expanding due to their inability to raise capital then we should be seeing larger companies rushing in to take market share. Retail stores should be opening up new outlets everywhere. Factories should be rapidly increasing output and transportation companies should be rushing into new markets.

Of course we don’t see any of this happening. If anything, most large businesses are expanding at a slower rate than they did before the crisis. If their competitors have been hamstrung due to a lack of credit, no one seems to have told Wal-Mart, Starbucks and the rest. They have both slowed the rate at which they are adding new stores, not sped it up as the credit shortage story would imply.

There is of course truth to the credit squeeze story, but it goes in the other direction. Stores that have seen their business plummet as a result of the downturn are in fact worse credit risks from the standpoint of banks. Many businesses that were profitable in 2006 and 2007 are now highly unprofitable and may not be able to stay in business. As a result, the banks that were happy to lend money just a few years ago are no longer willing to lend money to the same business. This drying up of credit happens in every downturn. It is just more serious this time because of the severity of the downturn.

The moral of this story is that we should not think that “fixing” the banks will get us out of the downturn. The problem is that we have to generate demand, which means having the government spend more money to stimulate the economy. Unfortunately, the politicians in Washington are scared to talk about larger deficits, so more spending seems off the table at the moment – therefore we get this nonsense about insufficient bank lending.

But hey, at the rate we created jobs in April, we should be back at full employment in 7 years anyhow. Who could ask for anything more?

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

WORDS THAT STICK

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

October 23, 2018
Patrick Cockburn
The Middle East, Not Russia, Will Prove Trump’s Downfall
Ipek S. Burnett
The Assault on The New Colossus: Trump’s Threat to Close the U.S.-Mexican Border
Mary Troy Johnston
The War on Terror is the Reign of Terror
Maximilian Werner
The Rhetoric and Reality of Death by Grizzly
David Macaray
Teamsters, Hells Angels, and Self-Determination
Jeffrey Sommers
“No People, Big Problem”: Democracy and Its Discontents In Latvia
Dean Baker
Looking for the Next Crisis: the Not Very Scary World of CLOs
Binoy Kampmark
Leaking for Change: ASIO, Jakarta, and Australia’s Jerusalem Problem
Chris Wright
The Necessity of “Lesser-Evil” Voting
Muhammad Othman
Daunting Challenge for Activists: The Cook Customer “Connection”
Don Fitz
A Debate for Auditor: What the Papers Wouldn’t Say
October 22, 2018
Henry Giroux
Neoliberalism in the Age of Pedagogical Terrorism
Melvin Goodman
Washington’s Latest Cold War Maneuver: Pulling Out of the INF
David Mattson
Basket of Deplorables Revisited: Grizzly Bears at the Mercy of Wyoming
Michelle Renee Matisons
Hurricane War Zone Further Immiserates Florida Panhandle, Panama City
Tom Gill
A Storm is Brewing in Europe: Italy and Its Public Finances Are at the Center of It
Suyapa Portillo Villeda
An Illegitimate, US-Backed Regime is Fueling the Honduran Refugee Crisis
Christopher Brauchli
The Liars’ Bench
Gary Leupp
Will Trump Split the World by Endorsing a Bold-Faced Lie?
Michael Howard
The New York Times’ Animal Cruelty Fetish
Alice Slater
Time Out for Nukes!
Geoff Dutton
Yes, Virginia, There are Conspiracies—I Think
Daniel Warner
Davos in the Desert: To Attend or Not, That is Not the Question
Priti Gulati Cox – Stan Cox
Mothers of Exiles: For Many, the Child-Separation Ordeal May Never End
Manuel E. Yepe
Pence v. China: Cold War 2.0 May Have Just Begun
Raouf Halaby
Of Pith Helmets and Sartorial Colonialism
Dan Carey
Aspirational Goals  
Wim Laven
Intentional or Incompetence—Voter Suppression Where We Live
Weekend Edition
October 19, 2018
Friday - Sunday
Jason Hirthler
The Pieties of the Liberal Class
Jeffrey St. Clair
A Day in My Life at CounterPunch
Paul Street
“Male Energy,” Authoritarian Whiteness and Creeping Fascism in the Age of Trump
Nick Pemberton
Reflections on Chomsky’s Voting Strategy: Why The Democratic Party Can’t Be Saved
John Davis
The Last History of the United States
Yigal Bronner
The Road to Khan al-Akhmar
Robert Hunziker
The Negan Syndrome
Andrew Levine
Democrats Ahead: Progressives Beware
Rannie Amiri
There is No “Proxy War” in Yemen
David Rosen
America’s Lost Souls: the 21st Century Lumpen-Proletariat?
Joseph Natoli
The Age of Misrepresentations
Ron Jacobs
History Is Not Kind
John Laforge
White House Radiation: Weakened Regulations Would Save Industry Billions
Ramzy Baroud
The UN ‘Sheriff’: Nikki Haley Elevated Israel, Damaged US Standing
Robert Fantina
Trump, Human Rights and the Middle East
Anthony Pahnke – Jim Goodman
NAFTA 2.0 Will Help Corporations More Than Farmers
Jill Richardson
Identity Crisis: Elizabeth Warren’s Claims Cherokee Heritage
FacebookTwitterGoogle+RedditEmail