“Normal” bank lending is no longer realistic

October 14, 2009

MacroScope is pleased to post the following from guest blogger James Carrick.  Carrick is economist at UK fund firm Legal & General Investment Management. He says here old patterns of lending are unlikely to return and that this means slow growth in developed countries.

“Despite £175 billion of quantitative easing, bank lending in the UK remains weak, threatening to restrain the economic recovery and equity market rally. 

Policy makers in the developed world have been working overtime to encourage banks to lend at the ‘normal’ levels experienced during the past decade. However, these “normal” levels are no longer realistic. The factors which contributed to the secular rise in debt over the past decade are now reversing. Populations are ageing, interest rates can’t go any lower and sub-prime lending is over.

As a result, higher levels of savings (where consumers pay down debt) and lower spending will weigh on the pace of the recovery.

This is not to predict a double-dip recession. Instead we are probably in store for a more subdued period of growth next year as households can no longer borrow money they don’t have, and unemployment remains high.

On the flip-side, while consumers in the developed world are still suffering a hangover from the credit-crunch, the debt party in many emerging economies is still in full swing.

This suggests that companies with exposure to the developing world will fare better.”

One comment

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Working in Personal Financial Services, I have to agree, the amount of lending available to customers will remain fairly low. The reason for this is three-fold though, not just because of unemployment.

Because the FSA was caught with its pants down and given a subsequent spanking by the government, it has come down so hard on retail banks, it is nearly impossible to lend. Even if they hadn’t, the lovely “sue first, sue later and ask questions if you can be bothered” our American bretheren have brought to our fair Isle, means you have to prove beyond all doubt that the lending is affordable, to the point of it taking so long to do a personal loan, it’s not worth the bank’s time and effort.

Finally, most people have too much credit available to them anyway to get through any scorecard in a modern bank. How many of us have several dormant credit cards with £5k+ limits on all of them? The amount of credit already available to people is astounding and the CC companies have made it 10x worse by simply incrasing everyone’s limits for being a ‘good payer’.

The Government’s bright idea of making sure everyone had more money in their pockets through the late 90’s and into this decade has forced house prices artificially high. Those kliving in a street house worth £15k suddenly found it was worth 70k. Before minimum wage and tax credits, they could aford a £10k mortgage, after that, they could afford a £60k mortgage so they went out and splurged on new cars, exotic holidays etc etc. They are still sat in the same house, with the same % outgoings now, but with another £50k pumped into the economy. Now everyone has done that, there are no more ‘lifestyle home owner loans’ getting pushed into the market so of course borrowing will decrase.

Time to start saving up for the next recession to be honest…

Posted by Adam K | Report as abusive