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This is due to consolidation pressure brought about by long-term low interest rates combined with inaccessible small consumer loans. When the banking crisis ha

This is due to consolidation pressure brought about by long-term low interest rates combined with inaccessible small consumer loans. When the banking crisis happened in 2008, there was some talk and pressure from consumer groups and governments (at least in the U.S.) to make capital available to individual consumers. However, this was a short-lived sentiment, or at least one that never had any teeth to it. Banks stopped lending to consumers as readily as they had before the crisis while the Federal reserve kept interest rates and especially interest rates they give to banks extremely low. This meant that if you already had capital(large businesses, wealthy individuals) it was easy to get nearly free money. whereas if you didn't it was nearly impossible. This led to consolidation as big businesses could buy up many small ones . I predict this will continue happening as long as the combination of low interest rates and inaccessible consumer loans continues.

sitkack 12y ago
That seems deeply wrong to me. Free money to grow your monopoly?
- endersshadow 12y ago
  Well, it's wildly oversimplified, but there aren't any actual glaring errors in it. Planet Money did a pretty good episode [1] wherein they looked at what effect chronically low interest rates actually have. It's a good primer in what exactly is happening, and why capital which, in theory, should be available to American consumers...isn't. [1]: http://www.npr.org/blogs/money/2014/01/31/268350791/episode-514-how-bernanke-set-off-tomato-protests-in-brazil http://www.npr.org/blogs/money/2014/01/31/268350791/episode-...
- 3am 12y ago
  Why is it wrong? It's exactly the reason anti-trust legislation exists in the first place. Monopolies have more pricing power and scale, so all else being equal they are lower credit risks than smaller companies. Since they enjoy an advantage on cost of capital, they have an intrinsic synergy when buying out a smaller competitor since they can increase their ROIC simply by lowering their capital costs (and in practice almost always have operational overlap). It makes sense for the banks, it makes sense for the large companies, and it makes sense for the small companies being acquired. The only one being harmed is the consumer. Not that I don't understand you point on a moral basis, it's just that is not the framework used to make these decisions.
- yourapostasy 12y ago
  This is an interesting emergent behavior of our current financial system. Generally speaking, access to credit is treated more importantly than possession of capital, due to the leverage credit provides. For individuals however, it is treated negatively (the more credit you have registered with the credit-reporting agencies the less future credit will be extended to you) while for businesses, because they generate income, it can be treated positively. This is generally because credit-granting institutions often do not perform a deep enough analysis to determine if credit utilization in a business is leading to organic or artificial growth; it's a difficult task to perform, and the difficulty is compounded by the long time scales it can sometimes take before the determination of organic-vs-artificial can be pronounced. Simply possessing sufficient credit to take control of assets until someone else pays more for the assets induces all sorts of "fake-it-til-you-make-it" games. Throw into this cauldron of unintended consequences the official and quasi-governmental support (which boils down to more credit extended for these activities) for real estate development, medical care, and education, and it is small wonder we see the kinds of unbalanced stresses we observe in banking, housing, medical and education sectors. An especially egregious example of this in action in the US are the "limits" on number of financed properties secured through government mortgage assistance programs. The layperson could be excused for believing that the mortgage assistance programs are meant for "the little guy", and the limit would be one financed property per household, owner-occupied. The taxpayer foots the bill, so it should only be for families and individuals who need the government-stabilized mortgages for the house they live in, right? What actually happens is there are a complex set of rules between Freddie Mac, Fannie Mae, FHA and VA programs that delivers government support for taxpayers to subsidize hundreds of thousands of "investors" to get taxpayers to supply the mortgage assistance for up to about 10 properties, only one of which needs to be owner-occupied, up to a $2M aggregate loan value. In HN-terms, it is as if there was a taxpayer subsidy that let you put up 10% of a $2M loan for your startup idea, dis-chargeable in bankruptcy, at credit rates you could not touch in the private markets. The scrutiny hurdle to clear to secure this financing is much lower than for YC; it's mostly taxpayer money that's at risk and the agency problem runs rampant here. This is an outright gift to the banks that originate the loans and service them for the origination and servicing fees but don't underwrite the risk, as well. You should have heard the cries of doom and gloom when the government agencies a few years ago mulled dropping the number of investment properties that could be carried. Most of these "professional investors" are oblivious to how real businesses obtain credit, and the real cost of credit in the private markets. There are no easy answers here, unfortunately. Credit is a legitimate feature of the modern economic landscape, and a bona fide tool in an honest business' toolbox.
riggins 12y ago
This is due to consolidation pressure brought about by long-term low interest rates combined with inaccessible small consumer loans. Low interest rates make consumer loans more accessible. It's much easier to service a 5% loan than a 10% loan. Here's the National Federation of Independent Business survey about what are the primary concerns of business. Interest rates/financing is last ... pretty much at an all time low. http://www.nfib.com/surveys/small-business-economic-trends/ http://www.nfib.com/surveys/small-business-economic-trends/ I'm pretty sure that if I dug up the Federal Reserve report it'd also show that banks have excess reserve (i.e. money that they'd love to lend at a reasonable interest rate rather than earning 0%).
- iamthepieman 12y ago
  Low interest rates make consumer loans more affordable, not more accessible. If there are other ways for a bank to use their cheap money (and there are many) then they have no motivation to make that cheap money available to small businesses and individuals.
  - psaintla 12y ago
    Exactly, lending standards are currently so ridiculous that the money isn't accessible to most small businesses.
  - riggins 12y ago
    Low interest rates make consumer loans more affordable, not more accessible. When a loan officer decides whether to approve a loan, they look at the collateral and whether the borrower can service the loan payments. A lower interest payment absolutely makes it easier for borrower to service the payments, and hence for a bank to justify a loan. Ergo, lower interest rates makes loans more accessible. Also your claim is contradicted by the survey I posted. For the last few years the NFIB survey has consistently returned the same results: access to financing is not a big problem for businesses. The evidence doesn't support the claim that the problem is the banks. BTW, this is true not only for the US, but for other economies as well. The exact same thing happened in Japan in the 1990's. If there are other ways for a bank to use their cheap money I haven't looked recently, but the last time I did banks had excess reserves and the Fed was debating whether to charge banks for depositing money at the Fed. Again, basically the opposite of what you're claiming. SWAG. You believe in Austrian economics?
hnnewguy 12y ago
>Banks stopped lending to consumers as readily as they had before the crisis This is an interesting narrative that fits well with the current anti-bank populist sentiment, but I'm not sure the data supports it. According to FRED data, Outstanding Consumer Credit contracted some after the financial crisis, as banks got their balance sheets in order, but it quickly spiked back to pre-recession levels, and has been growing at historically consistent rates ever since. Mortgage rates also hit all-time lows during the aftermath, which benefited consumers (though application conditions tightened).
- mikeyouse 12y ago
  Here's a chart that 'half' backs your point; http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=zTq http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z... There's clearly a lower slope on the log-scale than there was pre-recession, but it is still increasing. I haven't seen an update, but the Cleveland Fed wrote an article about this specific measure of commercial lending in 2011; http://www.clevelandfed.org/research/trends/2011/0211/01banfin.cfm http://www.clevelandfed.org/research/trends/2011/0211/01banf...
  - hnnewguy 12y ago
    >There's clearly a lower slope on the log-scale than there was pre-recession, but it is still increasing. Absolutely. Credit contracted pretty much across the board from 2008 to about 2010. I'm just not sure the story is "banks were lending to rich companies at low rates while the little guy couldn't get a loan". It seems to me there was a hiccup, then it was business as usual. Let's not forget easy credit was one cause of the depth and length of the Great Recession. I think the ease at which credit was available for a decade pre-recession has skewed our generation's view of "normal" credit conditions.
- pjmorris 12y ago
  Don't you have to back out mortgages, auto loans, and student loans to get a sense of how borrowing for business is affected?

sitkack 12y ago

That seems deeply wrong to me. Free money to grow your monopoly?

endersshadow 12y ago
Well, it's wildly oversimplified, but there aren't any actual glaring errors in it. Planet Money did a pretty good episode [1] wherein they looked at what effect chronically low interest rates actually have. It's a good primer in what exactly is happening, and why capital which, in theory, should be available to American consumers...isn't. [1]: http://www.npr.org/blogs/money/2014/01/31/268350791/episode-514-how-bernanke-set-off-tomato-protests-in-brazil http://www.npr.org/blogs/money/2014/01/31/268350791/episode-...
3am 12y ago
Why is it wrong? It's exactly the reason anti-trust legislation exists in the first place. Monopolies have more pricing power and scale, so all else being equal they are lower credit risks than smaller companies. Since they enjoy an advantage on cost of capital, they have an intrinsic synergy when buying out a smaller competitor since they can increase their ROIC simply by lowering their capital costs (and in practice almost always have operational overlap). It makes sense for the banks, it makes sense for the large companies, and it makes sense for the small companies being acquired. The only one being harmed is the consumer. Not that I don't understand you point on a moral basis, it's just that is not the framework used to make these decisions.
yourapostasy 12y ago
This is an interesting emergent behavior of our current financial system. Generally speaking, access to credit is treated more importantly than possession of capital, due to the leverage credit provides. For individuals however, it is treated negatively (the more credit you have registered with the credit-reporting agencies the less future credit will be extended to you) while for businesses, because they generate income, it can be treated positively. This is generally because credit-granting institutions often do not perform a deep enough analysis to determine if credit utilization in a business is leading to organic or artificial growth; it's a difficult task to perform, and the difficulty is compounded by the long time scales it can sometimes take before the determination of organic-vs-artificial can be pronounced. Simply possessing sufficient credit to take control of assets until someone else pays more for the assets induces all sorts of "fake-it-til-you-make-it" games. Throw into this cauldron of unintended consequences the official and quasi-governmental support (which boils down to more credit extended for these activities) for real estate development, medical care, and education, and it is small wonder we see the kinds of unbalanced stresses we observe in banking, housing, medical and education sectors. An especially egregious example of this in action in the US are the "limits" on number of financed properties secured through government mortgage assistance programs. The layperson could be excused for believing that the mortgage assistance programs are meant for "the little guy", and the limit would be one financed property per household, owner-occupied. The taxpayer foots the bill, so it should only be for families and individuals who need the government-stabilized mortgages for the house they live in, right? What actually happens is there are a complex set of rules between Freddie Mac, Fannie Mae, FHA and VA programs that delivers government support for taxpayers to subsidize hundreds of thousands of "investors" to get taxpayers to supply the mortgage assistance for up to about 10 properties, only one of which needs to be owner-occupied, up to a $2M aggregate loan value. In HN-terms, it is as if there was a taxpayer subsidy that let you put up 10% of a $2M loan for your startup idea, dis-chargeable in bankruptcy, at credit rates you could not touch in the private markets. The scrutiny hurdle to clear to secure this financing is much lower than for YC; it's mostly taxpayer money that's at risk and the agency problem runs rampant here. This is an outright gift to the banks that originate the loans and service them for the origination and servicing fees but don't underwrite the risk, as well. You should have heard the cries of doom and gloom when the government agencies a few years ago mulled dropping the number of investment properties that could be carried. Most of these "professional investors" are oblivious to how real businesses obtain credit, and the real cost of credit in the private markets. There are no easy answers here, unfortunately. Credit is a legitimate feature of the modern economic landscape, and a bona fide tool in an honest business' toolbox.

riggins 12y ago

This is due to consolidation pressure brought about by long-term low interest rates combined with inaccessible small consumer loans. Low interest rates make consumer loans more accessible. It's much easier to service a 5% loan than a 10% loan. Here's the National Federation of Independent Business survey about what are the primary concerns of business. Interest rates/financing is last ... pretty much at an all time low. http://www.nfib.com/surveys/small-business-economic-trends/ http://www.nfib.com/surveys/small-business-economic-trends/ I'm pretty sure that if I dug up the Federal Reserve report it'd also show that banks have excess reserve (i.e. money that they'd love to lend at a reasonable interest rate rather than earning 0%).

iamthepieman 12y ago
Low interest rates make consumer loans more affordable, not more accessible. If there are other ways for a bank to use their cheap money (and there are many) then they have no motivation to make that cheap money available to small businesses and individuals.
- psaintla 12y ago
  Exactly, lending standards are currently so ridiculous that the money isn't accessible to most small businesses.
- riggins 12y ago
  Low interest rates make consumer loans more affordable, not more accessible. When a loan officer decides whether to approve a loan, they look at the collateral and whether the borrower can service the loan payments. A lower interest payment absolutely makes it easier for borrower to service the payments, and hence for a bank to justify a loan. Ergo, lower interest rates makes loans more accessible. Also your claim is contradicted by the survey I posted. For the last few years the NFIB survey has consistently returned the same results: access to financing is not a big problem for businesses. The evidence doesn't support the claim that the problem is the banks. BTW, this is true not only for the US, but for other economies as well. The exact same thing happened in Japan in the 1990's. If there are other ways for a bank to use their cheap money I haven't looked recently, but the last time I did banks had excess reserves and the Fed was debating whether to charge banks for depositing money at the Fed. Again, basically the opposite of what you're claiming. SWAG. You believe in Austrian economics?

hnnewguy 12y ago

>Banks stopped lending to consumers as readily as they had before the crisis This is an interesting narrative that fits well with the current anti-bank populist sentiment, but I'm not sure the data supports it. According to FRED data, Outstanding Consumer Credit contracted some after the financial crisis, as banks got their balance sheets in order, but it quickly spiked back to pre-recession levels, and has been growing at historically consistent rates ever since. Mortgage rates also hit all-time lows during the aftermath, which benefited consumers (though application conditions tightened).

mikeyouse 12y ago
Here's a chart that 'half' backs your point; http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=zTq http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=z... There's clearly a lower slope on the log-scale than there was pre-recession, but it is still increasing. I haven't seen an update, but the Cleveland Fed wrote an article about this specific measure of commercial lending in 2011; http://www.clevelandfed.org/research/trends/2011/0211/01banfin.cfm http://www.clevelandfed.org/research/trends/2011/0211/01banf...
- hnnewguy 12y ago
  >There's clearly a lower slope on the log-scale than there was pre-recession, but it is still increasing. Absolutely. Credit contracted pretty much across the board from 2008 to about 2010. I'm just not sure the story is "banks were lending to rich companies at low rates while the little guy couldn't get a loan". It seems to me there was a hiccup, then it was business as usual. Let's not forget easy credit was one cause of the depth and length of the Great Recession. I think the ease at which credit was available for a decade pre-recession has skewed our generation's view of "normal" credit conditions.
pjmorris 12y ago
Don't you have to back out mortgages, auto loans, and student loans to get a sense of how borrowing for business is affected?