The latest business loans numbers show that bank loans to businesses are still falling. As I have written in recent posts here and here, large banks have systematically shut down their lending to small businesses over the past 2 months, an unintended consequence of the hugely profitable government bailout programs. Basically, today if you can’t sell it to the government don’t bother making the loan.

Bank Loans to Businesses Still Falling

Bank Loans to Businesses Still Falling

The chart above, from the Federal Reserve Bank of St. Louis, shows commercial and industrial loans from all banks. Banks have loaned approximately -$100 billion to U.S. companies since last fall. Tough to make payroll when you have to pay more to the bank than you get from the bank.

Bank C&I Loans Latest Data

Bank C&I Loans Latest Data

The latest weekly figures, above, show that banks have reduced loans to businesses by $15.8 billion–roughly -$4,000,000,000 per week–in the past month alone. That does not mean there is less borrowing; it means there is negative borrowing. Banks have forced their business customers to actually pay down their loan balances by $4 billion per week. The only way to do that in a small business is to lay off a worker or sell some inventory or other assets at a deep discount.

Essentially all business loans are small business loans–big public companies get their working capital in the commercial paper market. This is a major reason why employment continues to fall.

This is not the end of the world. I wrote a few days ago, in a piece called Time to Think About the Next Story-Inflation, Rising Rates, Commodity Prices, Weak Dollar, that the tsunami of bank reserves released by the Fed over the past six months is hugely profitable for banks and will eventually force a reopening of the credit markets. This chart is just to remind you that it is going to take longer to show up in jobs numbers than it has in bank stock prices.

JR

One of the (many) problems with using big increases in federal government spending as an economic stimulus tool is timing. You can’t appropriate and spend it fast enough to matter much during the downturn. Spending it years later, after the economy has already begun to recover on it own, then becomes an inflation worry.

09

There is a new CBO study, Implementation Lags of Fiscal Policy, that details the path of the money this time around. In spite of all tyhe talk we have seen about shovel ready projects not much of the money has actually made its way into the economy yet. As you can see in the figure above, except for HHS and the Dept. of Labor, less than 2% of the money appropriated to all other departments (Education, Transportation, Energy, …) has been spent. The total spent so far is just $24.6 billion out of $379 billion.

Stimulus Spending is Too Slow-Less than 25% Will be Spent in 2009

Stimulus Spending is Too Slow-Less than 25% Will be Spent in 2009

This chart details how much of the $787 billion in stimulus money will hit the economy each year over the next three years. As you can see, only 11% of the $308 billion appropriated to discretionary spending like highways, mass transit, energy and education will be spent by the end of this year. Overall, less than a quarter of total funds will be spent in 2009.

Why is this s problem? Because there are early signs of recovery coming in now every day. By the end of this year the recovery will be undeniably underway. That means next year (2010) and the year after will be periods of rapid growth and rising inflationary worries. That’s why bond yields have increased by more than a full percentage point in recent weeks with more to come over the coming months. And that’s one of the reasons why commodity prices have been rising so fast.

Investors should be very careful to avoid long-term Treasury bonds today

JR

The new U.S. Financial Data report out today from the St. Louis Fed shows that bank loans to business are still falling. This fits what we hear from entrepreneurs, that large banks have been systematically reducing availability of working capital loans for small companies—likely an unintended consequence of the Treasury bailout programs that make it bad business to make any loans that are not salable to the government.

Bank Loans to Businesses Still Falling

Bank Loans to Businesses Still Falling

The chart above shows that the lion’s share of the more than $100 billion (left scale) cut in total bank business loans since last fall is attributable to large banks (right scale). Small banks that do not have full access to the Treasury programs are still making loans.

Banks lend money to small companies, not big ones. Job gains (and losses) come from small companies, not big ones. That’s why this chart tells us we are going to see another lousy job report next week. I think we still have several months of job losses ahead of us before employment turns up again.

JR

(May 16, 2009) Yesterday I woke up a lot earlier than I like (that would be noon) to do the Fox Business 8AM Money for Breakfast show with Alexis Glick. Our assignment was to review the impact of recent government policies on the economy. It was set up as a debate with me squaring off against Christie Hefner (yes, that Hefner). Fun stuff. Here are a couple of the things we discussed.

JOBS- Government policies are destroying jobs, not creating them. The Treasury alphabet programs (TARP, TARF, BARF, TALF, ALPO, WALDO, DILDO,…) should have been titled the Hedge Fund Relief Act. They have set up a situation where banks can make tons of money by selling bales of certain kinds of paper to hedge funds who will make 30% returns on the paper. Banks have responded by ordering their troops to shut down all other activities, including small business loans, personal credit lines, home equity lines and jumbo mortgages.

Memo to Geithner (the Doogie Howser of finance): ALL JOBS come from small businesses. The shutdown of business credit lines is forcing small businesses to fire people. We get heart-breaking calls from these people every Saturday noon-2PM on our FBN entrepreneur show. You can measure the impact of the working capital shutdown in the weekly new unemployment claims reports (+637,000 last week) and the monthly job reports (-539,000 in April). You can also measure the loan activity directly in the chart below.

Change in Business Loans From One Year Earlier

Change in Business Loans From One Year Earlier

DUMB.
MARKET REG/PAY CAPS- Watch out folks; here come the price controls. Regulating derivatives and hedge funds is like trying to herd bullfrogs into a wheelbarrow. They will simply register in a different jurisdiction (CAYMAN,…).
Most dangerous, though, is Obama’s recent venturing into price controls. There is no surer way to screw up job growth than to have the government set prices. First it was executive salaries of companies feeding at the government trough, then compensation systems for the entire financial sector. Then, last week, the entire healthcare industry at a White House photo opp to announce ‘voluntary restraint.’ I have seen that movie before, first under Ford, then under Carter. It is a bad movie.
PRICE CONTROLS DO NOT WORK, they destroy jobs and reduce output. The reason is simple. The economy is a vast, parallel processing information network that transmits information about what is scarce and what is plentiful, what people want and what they don’t want, to the people who need the information to make decisions. Market economies use a symbol we call price to carry that information to the right people, solving the problem that von Mises and Hayek referred to as the division of knowledge. No person is smart enough or well-informed enough to make those decisions from the top.
JR