Monday, August 16, 2010

The Trillion is Coming! The Trillion is Coming!

The Federal Reserve says banks have eased their lending standards for small businesses for the first time in nearly four years. This could be the first sign that banks may start using some of the trillion dollars they have sitting on the sidelines with the Fed as excess reserves.

It's early in the game, but, according to CNBC,  in its new survey of bank lending practices, the Fed found that the easing in loan standards was occurring primarily at the country's largest domestic banks, while many smaller banks continued to struggle.

The Fed says it's the first time it had found easier lending standards being imposed on small businesses since late 2006. The Fed defines small firms as those with annual sales of less than $50 million.

Overall, though, demand for business and consumer loans was largely unchanged. However, if this changes and banks do start using their excess reserves, Bernanke and the Fed are going to have a new problem: How to drain reserves from the system fast enough so that things don't get out of hand from an inflationary perspective.

My suspicion is that he won't act quick enough and that inflation could really get out of hand. I do wish to emphasise that this is a possible scenario that could play out over the next few months and nothing that will necessarily occur this week. At present, continue operating with a negative bias for the stock market and economy. But, watch the money supply and excess reserves very closely.

1 comment:

  1. This could be a result of banks, who are desperate for yield, lowering their standards in order to keep from swallowed up by the earth.

    What I want to know is this: Who are they lending too, the gold plated small business credit, or the n'er do well with big dreams and little else?

    Low rates, like what we've been seeing with LIBOR, may be causing flawed capital allocation decision making.

    I'm very skeptical... This seems like desperate banks matching with desperate credits.

    (Remember, this info could be aged--the sorry economic news of the last 6 weeks may not be factored in here.)