Business lending has shot upward dramatically over the past few months, and many businesses report that banks are now competing to hand out loans, often at very generous rates. This is a sharp reversal from the climate of the past three years, in which lending was down and banks were constantly berated by analysts for hoarding cash.Given the swift turnaround, many are now concerned that some of these loans may not have been fully thought through, as the Wall Street Journal reports:
The profitability of the loans that banks are making is under pressure.More than half of banks surveyed in the quarterly Federal Reserve survey of loan officers said that lending spreads—a rough gauge of profit that measures the gap between the rates at which a bank borrows money and lends it out—had narrowed in the past three months. The survey said standards on loans to medium and large firms eased for the fourth quarter in a row. Respondents “cited more-aggressive competition,” the Fed said.Mr. Miller said lenders are learning they must in many cases “let deals walk” because terms are becoming too risky.
Still, this is an encouraging trend, and it shouldn’t come as a surprise. Capitalist economies are cyclical, after all. There are reasons why we’ve had business and credit cycles for hundreds of years, and there are reasons why we’ve always managed to rebound from them.When there are boom times you’ll hear people say “this time is different” and confidently predict that the boom will go on forever. Often, that misplaced faith helps create the asset bubbles that ultimately burst and bring about the next big downturn in the cycle. By the same token, when the economy slows, you hear plenty of people talking about the end of capitalism, the death of growth, and so on. This has been going on for hundreds of years—both the cycle and the fatuous commentary about it.The downturn in 2008–09 was unusually severe and destructive, partly because we had had a very long boom cycle before it, with the two largest economic expansions in American history coming back to back with only a very short recession between them. Many people got overconfident and overextended, and financial markets went way out on a limb. People got both stupid and greedy at the same time, something that often happens as an expansion reaches its sell-by date, positioning themselves for a major crash when it all fell apart.Now we can see that cyclical forces are pushing us toward recovery—even as the hangover of the last crash, bad government policy here and the stupidity pandemic among European policymakers conspire to hold us back. One of the forces pushing toward a recovery is pent-up business demand for new investment (new technology and equipment among other things) after several years of lean operations. With interest rates still held low by central banks, this is an excellent time to borrow, and as company and individual balance sheets improve, banks see more creditworthy borrowers out there. Consumers want and need new houses, cars, computers, tablets, refrigerators, you name it. Business wants to gear up to supply these and other needs. Central banks are printing money. People want to make money. The economy wants to grow. Politicians are making this as hard as possible, but at some point the sheer dynamism of capitalism seems likely to put us on course for another solid expansion.