Asymptosis

All hands on deck! Run for the exits! The Economist has just reported that lending to businesses in the euro area contracted by 1.2% from October of last year to October of this year. With that kind of catastrophic free-fall in lending, it’s not hard to understand why unemployment has gone up by 28% in the Euro area and 33% in the U.S.

Sorry. Excuse me if I can’t resist being facetious. On multiple occasions I’ve questioned the accepted orthodoxy that a shortage of lending is central to our current difficulties, or to our economy as a whole. This seems like a good time to reiterate those questions and re-examine the answers.

First, understand this:

1. Small businesses consistently put financing and interest rates at the very bottom or near-bottom of their lists of business constraints. That has been true for many years, it was true throughout the recent crisis, and it remains true at this very moment.

What are they short on? It’s no surprise: sales, a.k.a. demand. See here and here, and for the very latest data from November 2009 (including the chart above), the PDF here.

It’s true that there are exceptions around the world. Says The Economist:

According to a Gallup poll published in September, small businesses in Greece and Croatia say that access to finance is their biggest problem. Credit concerns are high on the list for small firms in France, Hungary and Italy as well.

Okay then. Greece and Croatia. But in most of the world it just ain’t so.

2. U.S. public companies disgorged every last penny they earned 2004-2008 ($2.4 trillion) in dividends and stock buybacks, plus another $200 billion–seven percent more than they earned. (Where’d they get the money? Cheap lending.) Does it sound like they were strapped for cash? With the big banks paying back tens or hundreds of billions in government loans only months after they were bailed out, are they strapped for cash now?

There are (still) truly oceanic quantities of cash flowing around this world, desperate to find solid, productive investments with decent promise of decent returns. A shortage of money and lending for business certainly wasn’t what got us into this mess, and there’s no sign that increasing lending to businesses will do anything to get us out of it.

But that belief system continues to bounce around the world echo-chamber–from the White House to Wall Street to The City to the MSM, even to the deepest corners of the econoblogosphere. BWWilds’ comment on the Economist story pretty much sums it up:

the money is not making its way to the small business owner and till it does no new jobs will be created.

That orthodoxy seems to go completely unchallenged, unquestioned, even unconsidered.

That’s certainly true in The Economist. Their December 12 article on “Europe’s corporate credit crunch” engages in extraordinary contortions to demonstrate the dire credit situation, using data that demonstrates…pretty much the opposite.

In their leader on the topic (bombastically titled “Small business, big problem: The sharp end of the credit crisis”), they share this graphic with us, demonstrating the precipitous decline in private-sector lending:

But of course this doesn’t show a steep decline in lending and borrowing. It shows a decline in the year-over-year growth in borrowing. Between 2004 and 2008 the amount of credit was growing by 7 to 12 percent a year–and it continued to grow (though more slowly) through most of 2009. Was that a good thing? Now it’s declining a little (by an amount that probably is not much greater than the survey’s measurement error). Is that a bad thing?

Then there’s the metaphorical title of the article–“Muck in the fuel pipe”–which displays a profound misunderstanding of the role of finance and lending in the business economy. Finance is not “fuel” for the “machine” of businesss–if anything, sales are, or maybe raw materials or labor. Finance is more like lubrication–it’s crucial to avoid things seizing up, but you don’t really need very much of it relative to the quantity of inputs and outputs.

Next, take a look at their front-and-center graphic:

…which re-creates this graphic from their source (Ifo):

Short story, for small and medium German manufacturers, credit is easier to get today today than it was in 2003, 2004, or 2005. (You didn’t hear of anybody complaining about credit crunches in those years.) Only large German businesses are experiencing more difficulties getting bank loans. In aggregate, things look pretty good:

And none of this says anything at all about how much constraint the lack of borrowing puts on businesses. In fact, it seems that the decline in lending is not because of a shortage of money or lenders, but because businesses aren’t asking for loans:

A German survey showed that in November the number of firms saying they faced tighter credit conditions ticked up again, having fallen for the previous three months (see chart). Yet a German government fund that is intended to help healthy companies borrow has had relatively low take-up to date. KfW, the state-owned bank that administers the fund, says it has received fewer than 4,000 loan applications for a total of about €15.6 billion ($23 billion), of which it has approved about half (granting loans worth €4.3 billion), mostly to small firms making car parts or industrial machinery.

Like small businesses in American, German companies aren’t clamoring for credit, even when the government’s trying to encourage them to borrow.

Ah, but it could be a problem!

The worry remains that when demand for credit picks up properly, disquieting clunks rather than the purring of a well-tuned engine will be heard from the banking system…

But even where the chances of a full-blown crunch appear remote, policymakers fret that if one set in, it would be difficult to reverse.

So most businesses around the world don’t report suffering from (as opposed to experiencing) a credit crunch, and there doesn’t seem to be any likelihood of a credit crunch emerging, and if one did emerge it might not hurt businesses all that much because they’re not really seeking loans in case, but…we really should really worry about it.

And it seems that policymakers are in fact worrying, especially about small businesses–the ones that are actually having less trouble getting loans:

The plight of small businesses, which are more dependent on bank credit than their larger peers, preoccupies policymakers. The ECB’s loan-officers survey showed that demand for bank credit weakened much more in the third quarter among big firms, which have access to capital markets, than among smaller ones.

So demand for loans is declining among both small and large firms, but more so among large firms, because they have other ways to tap into the oceans of global cash. But still:

Adam Posen, a member of the BoE’s monetary-policy committee, frets that Britain’s recovery may be stillborn because banks are not able to finance growth by small and medium-sized companies. The German government this month appointed a “credit mediator” to help smaller firms that are healthy but cannot get funding.

We’ve already heard about German companies’ response to those government efforts. Maybe policymakers should be “preoccupied” and “fretting” about something other than the health of lending institutions.

Likewise, I am agog when I hear reports like this about CIT–the big lender to small businesses that got itself in trouble recently:

“Small and medium-sized businesses are wild with concern that the bankruptcy filing of CIT Group will cut off the financing they use to pay employees and creditors…”

“They have to make payroll this week — they don’t know whether they will be able to meet obligations for payroll or for suppliers.”

These companies are taking loans to make payroll? Should they even be in business? (Think: creative destruction?) Is the ability to shift payments a month or two back in time truly crucial to the well-being of our business economy? We’re not talking about investment in expansion here, or anything like it.

I’ve been a equity partner and/or principal in a string of successful companies with a combined worth well into the tens of millions of dollars. And I’m here to tell you: successful business owners invest to expand their businesses when there is 1) demand, or 2) expectation of demand. Absent that, all the credit in the world won’t make smart businesspeople invest in expansion. You don’t buy new machines or hire new staff to run them because you have lots of lubricant available.

Again, you don’t need very much lubricant (read: finance and credit) to make the machine of business run smoothly. By all appearances, we seem to have several times more than we need or than is good for us.

But still, we have this on the front page of the New York Times:

Obama Presses Biggest Banks to Lend More

President Obama pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, prompting assurances from some financial institutions that they would do more even as they continued to shed their supplicant status in Washington, The New York Times’s Helene Cooper and Eric Dash reported.

Meeting with top executives from 12 financial institutions, Mr. Obama sent a clear message that the industry had a responsibility to help nurse the economy back to health and do more to create jobs in return for the huge federal bailout last year that kept Wall Street and the banking system afloat.

But Mr. Obama also confronted the limits of his power to jawbone the industry as banking companies continued to repay government money received in the bailout.

My question: instead of spending time jawboning and kowtowing to the bankers, should President Obama be waging a FDR-level jihad to rein them in and break them up? Or has he been convinced by his financial-industry advisors that the old orthodoxy–“Credit crisis! Need more lending!”–is true, and that he needs the banks as much as they need him?

Do we, in fact, need them? We got out of the Great Depression without much help from their ilk:

And you have to wonder how much help they’re going to be this time.

Obama does mention regulation and reform in the NYT piece:

“I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people,” Mr. Obama said in remarks after the meeting. “If they wish to fight common sense consumer protections, that’s a fight I’m more than willing to have.”

Okay babe, good words. Show us your stuff. To start with, you might consider some words like those that Roosevelt delivered:

The economic royalists hate me, and I welcome their hatred. The economic royalists have met their master.

Or to quote George W. Bush, “Bring ’em on.”

Responding to a U.K. tax on bank bonuses:

“This is extreme victimisation,” said one senior investment banker. “A lot of people have been working their tails off, never seeing their families to try and fix the problems of the past and now they are being discriminated against. It just makes me want to quit the job.”

So that’s it! They do all that work for us! To solve the problems of the past! They’re so generous, so self-denying. They deserve those bonuses! How can we be so churlish? Somebody call the EEOC.

Human beings will never cease to amaze me.

I pointed out recently that:

• From 2003 to 2008, the value of global over-the counter derivatives increased 300%–by a factor of four, while U.S. fixed capital (read: productive assets) increased by only 25%.

• Profits (or so-called profits) for U.S. financial companies have gone up 258% since Q4 2008, while profits for nonfinancials have gone up 5.5%

Meanwhile when businesses tell us about constraints on their growth, investment capital is the very last thing on their list.

Given that financial services companies don’t produce anything that people, businesses, or governments can consume (including, it seems, investment capital), these numbers look pretty crazy.

It seems that Paul Volcker thinks so as well.

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).