Bank lending is Key for economic growth

Credit is the lifeblood of out modern economy. The breakdown of the credit markets was the major factor behind the severity of the economic downturn of Y 2008 and the Key reason the recovery has been so sluggish in the developed western economies.

Note: rebounds from inventory recessions are sharp and strong. Recoveries from interest rate-induced recessions, such as those of the early 1980′s, are also relatively rapid. The same is true from recessions caused by consumer spending or trade swings.

However, he damage to the credit markets and credit creation takes a long time to fix. It takes time for banks to repair damaged balance sheets and to write off bad loans.

Three things that it takes;

1. It takes time for lenders to become comfortable extending credit again in difficult economic times.

2. It takes time for borrowers to become comfortable taking on credit, as seen by the unwillingness of potential home buyers to take on mortgages despite low rates and low home prices.

3. Time marches on.

It has been over 3 yrs since the October 2008 collapse. The data show that banks started expanding credit to businesses last year. There are signs that credit to the real estate sector is also now expanding too.

These are extremely good signs for the economy.

Expanding credit is critical to returning economic growth to long-term trends.

There are always risks in the financial markets. There are risks in the credit outlook.

But, time appears to be allowing the credit markets to adjust to the problems in Europe. US banks have had 2 yrs. to reduce risk associated with possible European government defaults. European governments have had time to build backup facilities to smooth the workings of the credit markets.

This is in stark contrast to the speed with which the US credit markets imploded following the Lehman bankruptcy.

If US banks have reduced the risk associated with possible European credit disruptions, the downside risk for US financial sector stocks is reduced to NIL, thus reducing the volatility for the overall market in Y 2012 compared to last years.

At the same time, credit conditions in the US are improving too. Lending is picking up. That will increase earnings for banks and produce upside potential for US financial stocks.

A stable or stronger banking sector and an up-trend in financial stocks could provide significant support to the US economy and stock market in Y 2012, as Financial and Tech sectors always lead a Bull Market.

These could be early signs that the end of the Modern Great Recession is In View. Stay tuned.

Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.
www.livetradingnews.com

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Posted by Shayne Heffernan on Feb 20th, 2012and filed underCentral Banks, Companies, Currencies, Financial Services, Financials, Heffernan Capital Management, Latest News, Paul Ebeling, Research, US Companies, USA.You can follow any responses to this entry through theRSS 2.0Responses are currently closed, but you can trackback from your own site.