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Home Publications Blogs Beat the Press Small Business Loans Are Down in a Recession: Why Should We Be Surprised?

Small Business Loans Are Down in a Recession: Why Should We Be Surprised?

Thursday, 03 June 2010 16:10

USA Today told readers that, "small businesses usually help drive job creation during recoveries but credit clogs have hurt hiring," in the context of covering a speech by Federal Reserve Board Chair Ben Bernanke. Mr. Bernanke did not actually say that credit clogs are hurting small businesses in his speech, noting the possibility that banks have reduced lending because they see fewer good lending opportunities.

If it is the case that banks have reduced lending because of inadequate capital then we should be seeing two things:

1) Banks that do not have weak capital conditions should be lending aggressively, since there are many good loan opportunities that are not being met by their competitors; and

2) Larger firms, who can raise capital directly on capital markets (e.g. by issuing bonds or commercial paper) should be expanding rapidly to take advantage of opportunities that are closed to their capital constrained competitors.

There is no obvious evidence of either #1 or #2, suggesting that the issue is not a problem of capital constraints by weak banks, but rather a situation where firms weakened by the recession are less creditworthy than they were formerly.

Comments (6)Add Comment
There's a third possibility
written by Tao Jonesing, June 03, 2010 6:39
and that's the reduced demand for credit.
written by izzatzo, June 03, 2010 7:44
Who’s on first base?
Small business. It goes first in a recovery.

Who's on second?
Bank credit. It goes second in a recovery.

Who's on third?
Demand for small business service. It goes third in a recovery.

But small business supply is on first. How can it go first when its demand is on third?

Because demand reaches home first before supply ever leaves first for second.

How can demand reach home plate when bank credit is still on second which small business needs to leave first?

We have a pinch hitter known as Pump Primer Keynes who can break the stalemate, but every since the umpires joined Zero Sum Teabaggers For No More Debt, whenever Keynes primes the pump with a run batted in, the umpires deduct one point off the score to cancel it out, so it can't be used as a deficit to run up the score and win the game.
written by Queen of Sheba, June 04, 2010 12:04
So, NOW banks worry about the creditworthiness of their loan applicants?!!?!

Who needs their loans?
written by Richard, June 04, 2010 6:29
A year ago March when the Market reached one of it lows, I started buy lots of very under priced preferred stock, that at the time were yielding about 30% dividends, these stocks never stopped paying their dividends, alhough the yields are somewhat lower now, as the prices are much higher. So, there is no longer as much a need to borrow, later this year I plan to buy a new shed for my back yard, and when and if the electric cars ever reach the market, I would like one of those. The economy will recover, and it doesn't require banks to give loans. We can recover without them, it might just take a little longer. A lot of us come from parents and grandparents who were frugal, we know how to be that way too.
written by jan, June 04, 2010 7:27
Like nearly everyone else, the banksters are being driven by an intense and shared fear of spending. Contrary to Richard Koo, recovery from this "Yin phase" fear is not endogenous and assured. Last time around, Americans overcame their entrenched fear of spending only when they acquired an even greater fear--fear of destruction by Japan and Germany.

What will it take this time? Fear of crude oil's destruction of the north Atlantic ecosystems? Fear of economic and political domination by China? Or, perhaps, the invention of an entirely fictitious enemy. Who would be America's Jews, I wonder. Latinos? Muslims?

We all would like to think the world will return any day now to prosperity and peace. But how so? By some sort of Walrasian or Keynesian or Friedmanite magic? That is to say, we should forget everything we know about human history and its manifold positive feedback loops. Instead of history, America is in heaven, right?
written by skeptonomist, June 04, 2010 9:15
The supposed drying up of commercial (non-financial) lending has been the subject of fables all along during the credit crisis and afterward. There were constant anecdotal reports that banks had quit lending and that the commercial paper market had frozen, but the actual data indicated otherwise (and still do - you can look it up; the Fed has the data). There were obvious reasons for such propaganda on the part of those who wanted the finance-industry bailout to go through and who still want banks to have favorable treatment, but many economists, not to mention the media, bought into the idea apparently without looking at the data (Dean was one of the few who questioned the idea that commercial credit had dried up).

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.