Worried Banks Sharply Reduce Business Loans

I have seen this cycle of reduced commercial lending in the past when even sound companies are turned away by banks if not unceremoniously thrown out the door so to speak. What scares me so much this time is that it is coinciding with a semi-virtual shut down of residential lending. Typically, commercial lending or residential lending have tended to cycle in the opposite direction so that when one segment is weak, the other is at least somewhat sound and helps cushion the economic downside. Now, both sectors seem headed sharply downward at the same time. This is NOT a good economic sign. Does McCain even know it's happening and what it might foretell? I doubt it. Married to an heiress and raised as a privileged son of a famous admiral, McCain has never lived in the real world where most of us find ourselves. Here are some highlights from the New York Times:

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Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring. The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

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“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.” Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.

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Earlier this year, credit extended by banks to companies and consumers was still growing at double-digit rates compared with three months earlier, according to an analysis of Federal Reserve data by Goldman Sachs. By mid-June, bank credit was declining at an annualized pace of more than 6 percent. That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity.

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But if the newfound caution of American banks is prudent in the long run, the immediate impact is amplifying the troubles with the economy. The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity. The financial system is not going along: As banks hold on to their dollars, mortgage rates are climbing. So are borrowing costs for corporations.

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But recent signs suggest that tight lending is spilling from housing into other areas of the business world. Companies with solid credit and profitable businesses can generally still get loans, but rates are higher and wait times are longer. According to a survey of senior loan officers conducted by the Federal Reserve in April, 55 percent of American banks tightened lending requirements for commercial and industrial loans to large and midsize companies — up from about 30 percent in the previous survey, in January. About 70 percent of the respondents said they have made such loans more expensive.

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“It’s the small business guy who creates most of the jobs,” said Mr. Kiefer, the First Capital chief executive. “If they can’t borrow to employ people, then we’ve got a mess on our hands.”