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Bank lending continues to pick up




Commercial & Industrial Loans (bank lending to small and medium-sized businesses) continue to demonstrate that we have passed an important advance in the business cycle. C&I Loans have risen at a 8.6% annualized rate over the past three months, a rate that begins to look pretty decent. That, after loans fell precipitously from late 2008 through late 2010.

Each time I post an update of this chart I get comments to the effect that it is still difficult for many businesses to get a loan. I don't doubt that at all, since total loans are still far below where they were just a few years ago. But it is nevertheless true that, on the margin, things are improving, and that's the most important.

The important thing about increased bank lending isn't that more lending will fuel economic growth; it's that more lending reflects increased confidence on the part of banks and businesses to take risks, and it's risk-taking that fuels growth. Government spending can't fuel growth, because the decision makers who direct the spending are not taking risks in the hopes of generating profit. They are simply agreeing to fund, with taxpayers' money, projects that sound important and will help them win votes in upcoming elections from favored groups. High-speed rail is a good example, since it sounds great, but if it were truly great (i.e., profitable), then there would be no shortage of private capital willing to undertake the task. As it is, profitable train lines are an endangered species.

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