A bad thing the banksters are NOT doing--withholding credit from the real economy

The frequent assertion that the evil banksters are hindering economic recovery by not extending credit to firms in the real economy, especially to small businesses, is apparently a myth. Forbes asked around and found it is much more accurate to say that loan demand is down. There are many community and regional banks that did not participate in the risky practices that led to the Global Financial Crisis and are sound, well capitalized, and ready to lend. These banks say there is low demand for loans because their usual customers are cautious about expanding because they don't have demand.  In addition, as in every recession, businesses get into trouble and become poor credit risks. The low-demand assessment is supported by this report from the Atlanta Fed:

A recent small business survey performed by the Atlanta Fed suggested that business loan demand was down primarily because of weak sales and modest revenue prospects. The credit availability picture was mixed. No surprise, construction-related firms and manufacturers had the most trouble obtaining credit during the last six months. But others did well in having their credit needs met. Of more than 200 respondents, nearly half did not look for credit at all, mostly citing weak sales or sufficient cash reserves.

Dean Baker suggests the reason the myth persists is because there is no political will to address the real economic problem--stagnant demand--because that implies the need for more government deficit spending to stimulate demand. If one is not willing to solve a problem, it is politically useful to deny it exists.

Mark Thoma reposts the Dean Baker piece and discusses it at length here and also ponders other ways to stimulate the economy. 

Update on Saturday, October 2, 2010 at 11:01PM by Skeptic

The Atlanta Fed report also stated that 55% of respondents gave poor sales/revenues as a reason for their not borrowing.