Bank Lending Continues Freefall

July 1, 2010

In the last few years, anyone in the market for bank financing has been stonewalled by their lenders for any type of loan including those for acquisitions, working capital or short-term business loans to weather the ups and downs of seasonal markets such as those here in SW Florida.

Long term financing for major projects is virtually non-existent.

On the advice of a friend and colleague, I recently subscribed to the Frontline Weekly Newsletter,written by John Mauldin a recognized financial expert and editor of Thoughts from the Frontline that goes to over 1 million readers each week.

In a recent edition of his newsletter, John discusses The Risk of Recession. He is on record as saying there is a 50-50 chance that the U.S. slips back into recession in 2011.

The research to support this conclusion indicates that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If taxes are cut by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases.

In responding to a question on what could change his prediction, John pointed to an increase in bank lending which would help to jump start the economy. However, as he points out in a very interesting chart, bank lending is still in freefall and if this trend continues bank lending will have fallen by 25% in about two years.

As he notes, this is truly a SCARY trend and is unprecedented in modern history.

Unless this trend begins to abate and lenders start to provide needed capital for businesses to expand and hire, a double deep recession could be in our future.

Posted by Scott R. Lodde


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