Just because someone wants a loan doesn't mean he or she is qualified to get one. Banks are lending out savers' money, and the fiduciary obligation is to do their best to ensure that the loans are repaid and that the savers' money is returned. When they fail to do so, the FDIC steps in, makes sure that depositors get their money (FDIC-insured deposits) and then closes the bank.
Hundreds of banks have been closed since 2007, but there are still more than 6,000 banks out there to serve their communities.
Private loan demand is very weak. Because of overbuilding in the boom, housing starts (single family, apartments, and condos) are a million units below where we would normally be, based on our population growth. That represents millions of lost jobs and, for banks, a million nonexistent construction loans that would normally be made by thousands of community banks to thousands of small builders across the country.
A recent survey of the 350,000 member firms of the National Federation of Independent Business (NFIB) revealed that 92 percent of the business owners said they got all the credit they wanted. About 65 percent of all business owners had no interest in a loan, and regular borrowing activity was at a 37-year low. Only 3 percent said that "financing" was their top business problem, while 33 percent cited "poor sales" as the top business problem, at least in the last 12 months.
Congress, through the Small Business Administration and the U.S. Treasury Department, has created two $30 billion loan programs to help banks make loans to small businesses; kind of an insult to small business since General Motors received more than $50 billion.
Few banks have taken advantage of these programs. Why? Well, loans must be repaid, so before an owner borrows money to hire a worker or buy new equipment, the owner must be very confident that the investment will generate enough revenue to repay the loan. Businesses cannot pay workers more than the value they bring to the business or the business will fail. Pretty simple.
There are potential borrowers who think they are creditworthy but can't get all the credit they want. In the best economy in history - think 2000 - 5 percent of the NFIB owners complained about that. Today, it's a bit higher, at 8 percent. But the drumbeat from Washington has been to blame the slow recovery on the banks for not lending.
The truth is, after two years of recovery (officially, the economy "bottomed" in June 2009), we have 9.2 percent unemployment and consumer spending has grown at a very slow pace. Compounding the problem, we built not only too many houses in the boom but also too many restaurants, retail outlets, strip malls, and the like, and these are competing for a depressed level of consumer-spending dollars.
Thus, "poor sales" is a widespread problem that leaves few owners confident enough about future sales levels to hire. Adding to the difficulty, governments at various levels are raising the cost of hiring a worker (unemployment taxes, health care, mandates like the proposed paid sick-day benefit Philadelphia City Council is considering, etc.).
With poor prospects that a new hire will bring in enough value to cover hiring costs or that new equipment or an expansion will increase sales enough to pay off any loan used to finance the outlays, loan demand is very weak. And businesses, whose profit-and-loss statements looked great prior to 2007, can't make the same strong case for a loan today.
Consumer spending (70 percent of GDP) is the key to recovery, but this has not been the focus of the administration's stimulus efforts.
In the mean time, if you want a loan, ask. If you don't ask, the answer is always "no." There are thousands of independent banks out there competing for your business. Don't be afraid to shop.
Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at firstname.lastname@example.org.