In times of panic, a drowning man will often pull his rescuer down under water with him. So it goes, one of the most dangerous threats to a Lifeguard’s safety is the very person they are trying to save. Sometimes… the choice must be made to let go.
For the U.S. financial sector, that time is now, as many lending institutions opt NOT to risk their own welfare for the sake of bringing sinking borrowers to shore. Here, a July 28 International Herald Tribune offers the following data:
- This April, 55% of American banks tightened lending requirements for commercial and industrial loans to large and midsize companies.
- In the last three months, bank credit has shrunk faster than any time since 1948.
- This year, short-term commercial paper “not backed by collateral” saw its largest annual decline since the last recession in 2001.
No loans = no expansion = no jobs/growth = further strains on the severely weakened economy. Make sense? NOT to the boatload of business owners recently shot down by higher rates, longer acceptance waits, and/or flat-out rejections by banks.
“The financial sector is not going along with the effort” to loosen the money flow, protests one such manufacturer. There’s an “arbitrary aversion to lend -- even with industries that continue to grow," adds another critic. “I’m stunned. This is what a bank is supposed to do. There’s sand in the gears.”
A Sea Change In Banks. In his bestseller Conquer The Crash, Elliott Wave International President Bob Prechter foresaw the “newfound frugality” of today’s financial sector. Get your own copy – free with a risk-free subscription.)
Truth be told, there’s nothing “arbitrary” about the banking sector’s newly adopted loan-a-phobia. In reality, the shift to thrift unfolding in lending institutions is a byproduct of a downturn in social mood. In Conquer The Crash, Bob Prechter outlines such a scenario via the following insight:
“When lending officers become afraid, they call in loans and slow or stop their lending no matter how good their clients’ credit may be in actuality. Instead of seeing opportunity, they see only danger. Ironically, much of the actual danger appears as a consequence of the reckless, impulsive decisions that they made in the preceding uptrend.”
A year or two ago, the only requirement banks had of borrowers was their ability to fog a window. Now, acquiring a loan is like getting into Fort Knox. Along the way, our analysts anticipated the more tangible expressions of falling social mood on the banking sector, such as: A drop in performance and earnings, a shift in policy from expansion to conservatism, and a crash in the value of stocks.
“Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets. Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry.”
Since then, the entire sector has endured record-setting losses, layoffs, management shakeups, defaults, downgrades, and write downs totaling $399 Billion (with long range estimates at $1 Trillion and counting). As for the Top Three Names cited in the above chart (Citigroup, Merrill Lynch, and AIG), stocks have plunged 60%-plus, 50%-plus, and 50% respectively since our 2005 publication.
Before you go into the financial waters, put on a life vest of objective analysis. Subscribe risk-free to the complete Financial Forecast Service today. (* The new, August issue of the Elliott Wave Financial Forecast is due out on Friday, August 1.)