Bailout

Debt demand datapoint of the day

By Felix Salmon

Insofar as there’s a decline in lending going on these days, it’s a function of both lower demand for credit and of reduced willingness to lend on the part of banks. Bloomberg has a startling datapoint on the demand side:

Caterpillar Inc., Eaton Corp., Walgreen Co. and General Electric Co. are among 256 companies that ended last quarter with $518 billion more cash than a year earlier after cutting capital spending by 43 percent.

But hang on a minute. Bloomberg here seems to have taken the S&P 500 and deliberately chosen the companies which raised cash and cut spending, while ignoring those which went the other way. In order to put these latest figures in perspective, I think it would only be fair to run the same exercise for previous years, to see what the equivalent figures have been historically.

What’s more, to the extent that some S&P 500 companies have historically borrowed and spent too much, thanks to abundant credit, it might actually be a good thing that they’re bolstering their cash cushions and moving to a more sustainable footing. Well, a good thing for the companies, anyway. Not such a good thing for employment.

That said, gains in employment have rarely if ever been driven by hiring in the S&P 500. If you want to see bank loans turned into jobs, the key sector to look at is not big companies but small ones. And when it comes to them, I think that the decline in bank lending is much more of a supply issue than it is with the S&P 500. If banks were more willing to lend to small businesses, I think that we would certainly see more loans taken out — and higher employment as a result.

Full post as published by Macroprudential on February 16, 2010 (boomark / email).