The money stock (M-2) has increased from $7,080 billion five years ago to over $9 billion today. With so much new money floating around, you would think that it would be easier to get a loan. So why are businesses finding it so difficult to borrow money?
The answer is that regulations on lending are increasing faster than the money supply. As we explained here, the incentive for banks is to lend more to governments, less to home buyers, and even less to commercial property owners.
The situation was exacerbated by the decision of international regulators over the weekend to hold firm on the required compliance of banks with Basel III regulations. These regulations require banks to increase their tier 1 capital, which are primarily government bonds, from the current 4% of total capital to 4.5% in 2013, 5.5% in 2014, and 6% in 2015. This will tend to crowd out the ability of banks to lend to homeowners and commercial property investors.
The regulations are part of the failure of the ability of regulators to see the trees through the forest. Throughout the world there are enormous opportunities for banks to lend on sound investment properties but, since the regulations aggregate properties into “tiers”, they are prohibited from making these investments.
An example would be hotels in Williamsport, Pa. This is where workers drilling for natural gas in the Marcellus shale deposit stay. Many of the workers are from Texas, Oklahoma, and other traditional natural gas producing states. Very high occupancy rates in these hotels for several years are almost guaranteed. Since national and international occupancy rates are low, however, hotels as an asset class are considered risky by regulators. Consequently, it’s hard for a bank to make a loan to a hotel in Williamsport.
Private equity funds are doing their best to shore up this gap. Sensible Lending Solutions, for example, has several programs that rely on private equity funds. There are dangers, however, that this lending might be curtailed if calls for additional regulations on “hedge funds” are heeded.
For borrowers looking to finance owner-occupied properties, perhaps the best solution is to pursue government funds through one of the agencies that offer them to small businesses. The Small Business Association, Department of Agriculture, and other government agencies have such funds available. These have been marketed through banks but the income that they receive from this lending isn’t as great as what they receive from marketing their own loan products, so they have not been actively marketing them. If you have a business in Pennsylvania and are interested in this type of financing, the best place to start is the South Eastern Economic Development Company of Pennsylvania.
Overall, it looks like we’ll be stuck with difficult lending markets for a while yet. The federal government continues to create massive amounts of new money and then prohibit the private sector from accessing it. If the federal government intended to destroy the U.S. economy, the most effective policies would be almost identical to their current policies. I have to believe that these policies are enacted and maintained out of ignorance instead of intentional malice.