Pallavi Gogoi, in “Business Loans Rise — But Not Quite To Pre-Crisis Levels” is cautiously optimistic about the increase in lending by the large commercial banks, echoing Don Ting, chief operating officer of Pyrotek of Spokane, who says: “We’re not losing money anymore, nor are we back to 2008,” he says, “but we are in a better place.”
It would be great to be “in a better place,” but is Gogoi right?
True, more debt (or “loans”) is exactly what the economy needs to rebound — assuming that borrowing and lending are motivated by two factors: 1) businesses are opening up lines of credit because they are increasing confidence about the future of the economy and 2) businesses are NOT using debt to make up for poor cash flow or other problems.
It can be difficult to ascertain the main reason for increased loans. Is it expansion, hiring, or — trying to cover a shortfall. This is one reason why economists rely on metrics such as real GDP, the money supply, the consumer price index, and unemployment as better leading indicators of economic performance. And unfortunately, this month, the Conference Board’s Leading Economic Index declined for the first time since June 2010, and one of the leading business cycle forecasters, the Economic Cycle Research Institute, has predicted a global economic slowdown for the summer of 2011.
If the reason for the increase in lending is everyone’s increased confidence, then the economy is on the right track. If, however, the leading indicators are right, Gogoi, may have been too confident too soon and we may be looking at a cooling economy over the summer and — worse — a stalled economy in the fall.
If that’s the case, the big banks may once again beat a hasty retreat leaving the lending market more open to the smaller community banks and peer to peer lenders. We hope Gogoi is right, but as the old saying goes, ‘hope for the best — prepare for the worst.’