Credit Is Once Again Becoming Easier To Get

Most businesses and individuals are now finding it easier to borrow money, which in my opinion may cause more financial trouble for both consumers and businesses. Ben Bernake, Federal Reserve chairman, recently said that credit conditions in the U.S. have improved significantly in a number of areas. He said large companies were selling bonds at historically low interest rates and that people with strong credit had "ready access" to credit card and auto loans. However, he also noted that many creditworthy Americans were finding it difficult to obtain mortgages. He also said that small business owners who used their homes as collateral for loans also faced "challenging" conditions.

The Fed chairman also said banks had made "considerable progress" in reducing risk and building reserves against future loan losses. Cash and securities holdings at large banks have doubled since 2009. The way banks finance themselves has also become safer. Large banks are now flush with deposits and depend less on short-term loans from financial institutions for their borrowing. During the fall 2008 financial crisis, much of the lending amongst financial institutions froze, which spread panic and helped push the economy into the deepest recession since the Great Depression of the 1930s.

Mr. Bernake noted that most of the 19 largest banks passed "stress tests" earlier in the year, meaning that they would probably survive and be able to lend in a financial crisis worse than 2008. The situation during those tests was that the unemployment rate rose to 13%, stocks dropped by 50% and home values dropped by more than 20%. Home loans have fallen 13% off from their peak, after adjusting for inflation.

The Fed chairman said a slow economic recovery, a troubled housing market, and cautious lenders mean that the situation is unlikely to improve quickly. Mr. Bernake also said that small loans from banks, though increasing, were still 15% below their peak since 2008, which occurred at the end of last year. In my opinion, the recent ease in credit may lead to consumers borrowing and spending more than they can afford. This, in turn, may lead to another rise in bankruptcy filings. As I previously discussed, bankruptcy filings have been on a steady decline recently. Please feel free to leave any comments or questions you may have.