You may recall that I have been critical of the Federal Reserve’s plan to introduce money into the economy through both a lowering of interest rates and “quantitative easing.” My point was that even with benchmark government interest rates at nearly zero, folks still weren’t exactly lining up to borrow money. That appears to be changing.
Thursday the Federal Reserve reported that for two consecutive months the amount of commercial loans held by banks is slowly increasing. In other words, borrowers are going to banks to borrow money and those banks are actually lending money to those folks. Furthermore, Moody’s Analytics estimates that fourth quarter commercial lending has risen by 0.2% – the first quarterly rise since the onset of the recession. Clearly this is a very tiny amount. However, these data are extremely encouraging. Why?
For an economy to grow long-term it needs great, innovative ideas. People need to find new ways of solving old problems or create entirely new, but important, things. Further, those ideas have to be properly funded in order to become material and tangible. Sans funding, many of these great ideas die. For two years people with great ideas have had a difficult time finding money to support their ideas. So a properly functioning economy has healthy capital markets (i.e. money raising venues). One of the reasons that the economy has been so slow to recover is because people couldn’t raise money to develop their ideas into new businesses.
The two predominate forms of capital are debt and equity. Now one of the two markets, the debt capital markets, are finally starting to thaw. Money flow is the blood for the economic body and it seems that debt capital is finally being pumped through the system again. Now we need for the equity markets to thaw, too!
Jason
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