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This is due to consolidation pressure brought about by long-term low interest rates combined with inaccessible small consumer loans. Low interest rates make co

by 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?
  - hga 12y ago
    I wasn't aware this would be predicted by Austrian economics, but I don't know enough of it/my study of it was back in the '80s. Could you be more specific? However, what I generally understand is happening, or rather is not happening, is called "pushing on a string". No matter how low the rates or availability of loans (not so sure that was true in Japan in the '90s), nothing can get a business to borrow money if they don't think they'll be able to pay it back. I'd also suspect that's somewhere in the priority list of central banks below preventing widespread bank failures (note what happened after it was decided to throw Lehman Brothers to the dogs, albeit we'd better be past that point in the US), and very possibly making it very cheap for the government to borrow money. "Trillion dollar deficits as far as the eye can see" don't hurt so much when interest rates are so low....
    - riggins 12y ago
      I think its mostly that Austrian economics focuses on the individual and rejects macroeconomics based on aggregate demand. What I really think is going on is not that people really understand Austrian economics and find it logically persuasive so much as they want some reason to ignore Keynesian economics. However, what I generally understand is happening, or rather is not happening, is called "pushing on a string". No matter how low the rates or availability of loans (not so sure that was true in Japan in the '90s), nothing can get a business to borrow money if they don't think they'll be able to pay it back. That's exactly right. And that's where a lot of economic theories break down ... because its assumed that firms always maximize profit. If you assume that, firms will always borrow money if money is free (i.e. 0% interest rate), and put the money to use earning >0%. I think we've seen that's not a great assumption though because firms are not always maximizing profits.
      - hga 12y ago
        All too often it seems to maximizing egos ... until the firm's Long Night begins.... Going from first principles, the application of "macroeconomics based on aggregate demand" to the microeconomics of specific firms is always going to be iffy. Zillions of factors, e.g. local demand, regulatory regimes, uncertainty of about the latter and tax regimes, current and future ... heck, I gather the Austrians don't entirely dismiss Keynes's animal spirits concept, they just have some explanations for it, which get harder to apply the more you move away from purely financial considerations. E.g. if Main Street, these small and medium size businesses, conclude they've been declared Enemies of the People, the animal spirits of the people in them are going to be affected. Not to Godwinize this discussion, but I gather those of the school who survived did so by getting the hell out of Dodge (https://en.wikipedia.org/wiki/Richard_Ritter_von_Strigl#Later_years https://en.wikipedia.org/wiki/Richard_Ritter_von_Strigl#Late...) and that also critically disrupted the school. You can imagine how scholars felt when they discovered von Mises' archives in Moscow after the Cold War....
- 3am 12y ago
  That doesn't explain the NFIB survey result where only 2% of respondents rated "Fin. & Interest Rates" as the single most important small business problem in March 2014 (the lowest of any specified reason). edit: Yes, nfib, forgive my typo. I don't agree with how you're interpreting the scope of the discussion.
  - thedufer 12y ago
    I assume you mean NFIB? Asking small businesses doesn't really address the point, since the discussion appears to be about potential businesses that fail to find funding.

by riggins 12y ago

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?
- hga 12y ago
  I wasn't aware this would be predicted by Austrian economics, but I don't know enough of it/my study of it was back in the '80s. Could you be more specific? However, what I generally understand is happening, or rather is not happening, is called "pushing on a string". No matter how low the rates or availability of loans (not so sure that was true in Japan in the '90s), nothing can get a business to borrow money if they don't think they'll be able to pay it back. I'd also suspect that's somewhere in the priority list of central banks below preventing widespread bank failures (note what happened after it was decided to throw Lehman Brothers to the dogs, albeit we'd better be past that point in the US), and very possibly making it very cheap for the government to borrow money. "Trillion dollar deficits as far as the eye can see" don't hurt so much when interest rates are so low....
  - riggins 12y ago
    I think its mostly that Austrian economics focuses on the individual and rejects macroeconomics based on aggregate demand. What I really think is going on is not that people really understand Austrian economics and find it logically persuasive so much as they want some reason to ignore Keynesian economics. However, what I generally understand is happening, or rather is not happening, is called "pushing on a string". No matter how low the rates or availability of loans (not so sure that was true in Japan in the '90s), nothing can get a business to borrow money if they don't think they'll be able to pay it back. That's exactly right. And that's where a lot of economic theories break down ... because its assumed that firms always maximize profit. If you assume that, firms will always borrow money if money is free (i.e. 0% interest rate), and put the money to use earning >0%. I think we've seen that's not a great assumption though because firms are not always maximizing profits.
    - hga 12y ago
      All too often it seems to maximizing egos ... until the firm's Long Night begins.... Going from first principles, the application of "macroeconomics based on aggregate demand" to the microeconomics of specific firms is always going to be iffy. Zillions of factors, e.g. local demand, regulatory regimes, uncertainty of about the latter and tax regimes, current and future ... heck, I gather the Austrians don't entirely dismiss Keynes's animal spirits concept, they just have some explanations for it, which get harder to apply the more you move away from purely financial considerations. E.g. if Main Street, these small and medium size businesses, conclude they've been declared Enemies of the People, the animal spirits of the people in them are going to be affected. Not to Godwinize this discussion, but I gather those of the school who survived did so by getting the hell out of Dodge (https://en.wikipedia.org/wiki/Richard_Ritter_von_Strigl#Later_years https://en.wikipedia.org/wiki/Richard_Ritter_von_Strigl#Late...) and that also critically disrupted the school. You can imagine how scholars felt when they discovered von Mises' archives in Moscow after the Cold War....
3am 12y ago
That doesn't explain the NFIB survey result where only 2% of respondents rated "Fin. & Interest Rates" as the single most important small business problem in March 2014 (the lowest of any specified reason). edit: Yes, nfib, forgive my typo. I don't agree with how you're interpreting the scope of the discussion.
- thedufer 12y ago
  I assume you mean NFIB? Asking small businesses doesn't really address the point, since the discussion appears to be about potential businesses that fail to find funding.