I once had a boss, and everyone said he was a penny-pincher; wouldn’t agree to spend a dime on any new project. “He’s a nice enough guy,” I was told. “But you’ll never get him to hand over any money.”
But that wasn’t my experience. I did find a man who was unwilling to needlessly shell out money. But if he was presented with a well thought-out plan, and if I could reasonably answer his (very perceptive) questions, he didn’t hesitate to fund the projects I was working on. The key, of course, was that because of all that planning and preparation, those projects tended to work. And they tended to make money.
Most of the folks who had asked for money from him didn’t do a good job of easing his anxiety, or showing him that the money would be put to good use. “I’ve got something I want to spend money on. Give it to me,” isn’t a great sales pitch.
In a company of dozens, maybe four of us knew how to approach the boss. To everyone else, he was an unreasonable tightwad.
Like my former boss, banks these days are getting a pretty bad rap. They’re not lending enough. Their recalcitrance is hobbling the economy. They’re taking cheap government money, and they’re not putting it back out to fund small businesses. Each of those is true, to some extent at least. But I don’t think it’s because banks are being miserly. It’s because we’d all be worse off if they actually started loaning money to all the borrowers that want it.
Survey Says…
Last week, the Federal Reserve Board released its latest survey of senior loan officers’ opinions on bank lending. The survey results haven’t changed much since the last time the bankers were asked what’s going on. Loan demand by businesses is strong, in many areas even rising. But lending standards remain high and money tight.
That means businesspeople keep walking into banks asking for loans. And in most instances, they’re walking out without one. That, in turn, leads to stories in newspapers and on television that tight credit is strangling the economy.
Bankers, it seems, are always doing something dramatic to the economy. They’re either drowning it in debt, or throttling it into a stupor. We have lived through years of easy money. For most of those years, that degradation of lending standards actually boosted the overall economy – until it all went too far. Then, when we had fully abased any sense of puritanical thrift, we saw the cost of loosening our purse strings that much. It’s a price we’re all still paying.
So it seems counterproductive to entreat banks to lower their lending standards yet again. Banks make money by making loans. They want to believe in the would-be borrower. But they also want to be paid back. Just like my former boss, the lender wants to hear a well thought-out plan from the borrower. When lenders ask probing questions, they want the potential borrower to have good answers. They want better pitches than what you can see every Friday night on “Shark Tank.” This isn’t a television show, it’s real money at risk.
Still, there is a self-fulfilling prophecy at work here. The longer banks remain tight with funds, the harder it is for the economy to recover, the more difficult it is for borrowers to show they can thrive in a deteriorating economy, and the less that banks will lend.
What’s interesting in the Fed’s latest survey is that it did find some banks easing up on terms for commercial and industrial loans. But the bankers said they aren’t doing it because they believe the economy is improving. They’re doing it because non-bank competitors – apparently carefree without disapproving regulators — are swiping their customers.
So, somebody is willing to take the risk that these businesses are going to succeed. The question is: Should banks be relaxing standards to tamp down public disgust, and to meet competitive pressure?
Maybe not. When mortgage lending went nuts, most community banks stayed out of the chaos. A few have fallen in this housing bust, but nowhere near the numbers of mortgage bankers and brokers that have closed shop due to an unabashed lending glee.
We do need banks to lend in order for business to grow. But that growth has to be sustainable, or the economy will falter and the bank will fail. Bank critics might hush for a short while as money flowed to borrowers, but they’d quickly pipe up as those loans soured. And then they’d be blaming the banks for forcing borrowers to take money they shouldn’t have been qualified for.
No, right now, bankers are the boss. They shouldn’t care whether they’re held in high esteem or low. They should just care whether their potential borrower has a substantive tale to tell. Reward the ones who do. Say, “Good luck and good bye,” to everyone else.
Vincent Michael Valvo is CEO of Agility Resources Group LLC. He can be reached at vvalvo@agilityresourcesgroup.com.
