Is the Credit Crunch Being Given Too Much Credit?

October 20, 1991|By THOMAS EASTON

New York -- Along with baseball, sex and politics, Americans have an ongoing (and probably unhealthy) fixation with debt. Whereas in the past decade, individuals, companies, and the government, were excoriated for borrowing too much, now even the president blames the country's economic problems on our collective inability to borrow enough. Prosperity is rumored to have been credit crunched.

True? First, some facts. Banks and thrifts, once the two great reservoirs of credit for businesses, have steadily reduced their lending since the beginning of last year, reversing a trend dating back to World War II, with the brief exception of 1975. For some small companies dependent on long term relationships with some troubled banks, crushed could be a more accurate description than crunched.

Fortunately for America, however, banks and thrifts are no longer the only sources for money. Consequently, despite this contraction, the amount of outstanding debt continues to expand, albeit at a far slower pace than in the past decade.

Instead of from banks, money is being raised in vast quantities through commercial paper, certificates of deposits, long term bonds, and an almost infinite number of recently invented financial instruments.

Large companies can have direct access to this money; small companies and individuals typically cannot. But the range of what's known in the trade as "financial intermediaries" has swelled. The thrift down the street may be insolvent, but note the adjacent new store-front office of Commercial Credit, Beneficial Corp., Household Finance.

Want a credit card? Who needs a bank? Call AT&T. Fantasize about financing a film, a notoriously high risk venture? At a recent conference of independent producers in New York the merits of using cash advances from charge cards was a topic of serious discussion.

To finance larger items, industrial companies have added vast financial subsidiaries. Need a new car or truck for work, or even a mainframe computer? The major manufacturers, General Motors, Ford, Chrysler and IBM, as well most of their competitors, have long-ago created divisions to provide the funds.

For some borrowers, of course, this is all scant solace. Surveys by the Federal Reserve Bank of Richmond covering the Maryland-to-South Carolina region reveals "anecdotal evidence" (or in more common language, squeals) suggesting many good businesses have been denied loans.

To say banks are less relevant is not to say they are irrelevant.

Still, restraint of credit isn't necessarily bad. Consider the president's backyard, the Washington D.C. commercial real estate market, the source of the most emphatic complaints for credit denial in the Richmond Fed's survey.

While builders today may complain of too little money, their problems may have less to do with being parched than being drowned. A deluge of credit in the 1980s led to too many buildings and therefore too-low rents and therefore bankruptcies, undermining both builders and banks.

For most borrowers, the Richmond Fed concludes, credit has been "adequate". That, of course, raises the question of interpreting "adequate."

In addition to alternative sources of funds, individuals and businesses may be borrowing less from banks because in a recession they are concerned about carrying ever-expanding amounts of debt.

The one area of borrowing that has remained stable, real estate, is thought by many to be because that is the area where business conditions have precluded repayment.

The sharpest decline in regional lending has come in the area of consumer loans, despite intense efforts, according to the Richmond Fed, of regional banks to push this type of loan. Perhaps when confronted with money, people have decided to just say no.

Instead of credit, major companies are turning to equity, the most conservative form of financing. This year will almost certainly set a new record for stock issuance. Despite poor earnings, corporate balance sheets may end the year in better shape than they began.

The real balance sheet wrecker, the leveraged acquisition or buyout, has virtually disappeared. Black & Decker's multi-billion dollar acquisition of Emhart, financed largely by debt, would be almost inconceivable today, as would the heady bidding war between Campeau and R. H. Macy for Federated Department Stores.

As opposed to five years ago when cash-laden companies were venerated by security analysts only because of their suitability for takeover, they are today praised for prudence, and often likely to command a higher share price as a result.

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