Federal Reserve governor Elizabeth Duke says small-business lending is looking up | Business

Federal Reserve governor Elizabeth Duke is due to give a really nice piece of testimony tomorrow unpacking what’s going on with small-businesses lending. Judging by the advance text up on the Fed’s web site, it will be a joyously nuanced picture. Banks are hesitant to lend, yes, and are sometimes hamstrung by their own imprudent lending of the past. But businesses are also often not in the mood to borrow, considering the uncertain economic recovery. This does not make for a snazzy populist sound bite, but, alas, it is an honest portrayal.

Duke makes one other major point: bank examiners, like those employed by the Fed, shoulder some of the responsibility.

That’s right, someone is owning up to something. To wit:

The Federal Reserve has been placing particular emphasis on ensuring that its supervision and examination policies do not inadvertently impede sound small business lending. If financial institutions retreat from sound lending opportunities because of concerns about criticism from their examiners, their long-term interests and those of small businesses and the economy in general could be negatively affected, as businesses are unable to maintain or expand payrolls or to make otherwise profitable and productive investments.

The reason she says that is because banks have in some cases been feeling pressured by their regulators to keep risk-taking (i.e., loan-making) at a bare minimum. She goes on:

The Federal Reserve has directed examiners to be mindful of the effects of excessive credit tightening on the broader economy. As a general matter, we do not expect examiners to adversely classify loans based solely on a decline in collateral value where, for example, the borrower has stable revenue streams and thus the ability to repay the loan. We have implemented training for examiners and outreach to the banking industry to underscore this expectation. We are aware that bankers, as well as examiners, may become overly conservative in an attempt to ameliorate past weaknesses in lending practices, and are working to emphasize that it is in all parties’ best interests to continue making loans to creditworthy borrowers.

Bank examiners have been told to be more realistic: there’s one reason to be optimistic about the possibility of small-business lending ticking up. Duke also gives another:

There is… some tentative, anecdotal evidence that many bankers may be devoting considerably more energy toward extending new loans in 2010, as contrasted with their overwhelming preoccupation in 2009 with collecting on or writing down loans already on their books. With respect to small business lending in particular, some banks have instituted so-called “second look” programs that–as the name implies–involve a reconsideration of loan applications that would not be pursued based on a credit scoring model alone.

Although loans to small businesses are still performing worse than those to larger companies, and lenders know that. So don’t expect anything to change too quickly.

Small Dairies Go Under as Milk Prices Sink Again

PLAINFIELD, Vt. — The MacLaren brothers are third-generation dairy farmers, but they will likely be the last in their family.

After working all their lives on the hillside farm in Vermont that their grandfather bought in 1939, rising to milk cows at 3 a.m., even in blizzards and sub-zero temperatures, they decided to call it quits, auctioning off their roughly 200 cows and equipment ranging from stalls and hoof trimmers to tractors and steel pails.

The Term “Pink Collar” Is Silly And Outdated — Let’s Retire It

You can’t throw a stone around the internet today (if that’s even possible?) without running into the New York Times’ new study on so-called “pink-collar jobs.” The report found that over the last decade more and more men have flocked to traditionally female-dominated career fields like nursing and teaching. Fascinatingly, the study disproves the commonly held belief that this transition is the result of the recession, proving that men’s migration into the pink isn’t out of some alleged desperation. Men want those jobs.

ps56penn62pr64

When all of the nation’s money, with the exception of coins, is created as loans from a privately owned banking system; when all of those loans must be repaid in full at a specified time; when interest must be paid on all of those loans; when no one creates money to pay the interest; how can lending more money lead to anything other than disaster?
waltwriston

It’s my contention that the Fed exist solely to protect the banking system and it only reason it boost any liquidity into the REAL economy is to keep those loans performing.
tanboontee

Are your questions not obsolete?

China has already started to dump part of the Treasury bills. Apparently, the leaders are frustrated with and irritated by Washington’s recalcitrant attitude.
robert1952

You are making a common error. Loans plus interest are paid back from income. Income is a rate of earnings, like $100,000 per year. Suppose you owe $200,000 which is a fixed quantity. Suppose there is only $50,000 in circulation, but it is turned over 10 times per year so total earnings is $500,000 per year and as above your earnings share is $100,000 per year. You can pay back the $200,000 loan in two years. The $50,000 of total money doesn’t change when it changes hands, but it can serve as the medium of exchange for any level of income depending on the turn over of the money, or put another way, the velocity of money.
ps56penn62pr64

Thank you for reading my post and being kind enough to take the time to respond to it. I must say that I agree with your post when viewed from the point of view of a single loan. However. Allow me to make clear the propositional content of my post.

When say, “Loans plus interest are paid back from income.” I have to ask, “who created the money for the earned income?” Although you are right, money can circulate over and over through the economy, it seems to me, someone must create or issue it in the first place. Do you agree? Unless the income money is being made by a counterfeiter, it must be issued by one of three entities that possess the legal authority to create US money: the US Government using its inherent sovereign authority, the Federal Reserve and commercial banks using authority delegated to them by Congress in the Federal Reserve Act of 1913.

The US government provides about $40 billion in coins, making up 0.08% of the more than $50 trillion money supply, this according to the US Coin and Currency Report. The Federal Reserve issues about $1 billion in paper currency, paper money making up about 2% of the money supply. The FED creates trillions of dollars buying the US national debt, in its role as the lender of last resort money is created as bookkeeping entries in the government’s account, exchanged for US government bonds. This money, created out of nothing, is the base money used in the fractional reserve banking system by commercial bank to issue the remained of the money supply.

Let me make clear the central thesis of my post. Both the Federal Reserve and the commercial banks create money as debt.

So every dollar, with the exception of coins, is someone’s debt, that someone could be the US government, businesses, institutions or private citizens, every dollar in the system is scheduled for repayment, every dollar bearing interest.

To keep the system from collapsing, the banking system continually makes new, larger loans, using the newly created money to service the old loans, constantly replace money deleted from the economy when old loans were repaid.

The new money is created by fractional reserve lending procedures, like ordinary counterfeiting made legal by an act of Congress the procedures create currency without commiserate real world value. Diluting the existing currency, devaluing it buying power, increasing the total debt, finally reaching a mathematical limit where new loans simply cannot be created fast enough to keep the scheme going, the system will collapse, performing like any other ordinary pyramid scheme.
dochosvet

It seems to me there is one more step in where the money comes from. No matter who prints it and what shape it is, it only is a symbol of my labor. If I work one hour and my labor is worth $100 than through some means I acquire a hundred dollars in paper, checks, credit card or something. All that money is, is a representation of the value on my time. With that thought I would like to think my time is undervalued (probably not) and I know Wall Street is asininely over valued but still that is what the paper or numbers represent.
With that in mind I have never understood the problem with a large debt overseas from buying more than we sell as it still is just a symbol of peoples time.
The world agrees to use some symbol of “currency” so I don’t hand you six sheets of toilet paper and claim that represents the value of my work yesterday.