Economic Carbon Monoxide

Tighter Lending Standards Smother Growth

Carbon monoxide can be deadly and on average more than 430 Americans perish annually with more than 50,000 people receiving treatment in an emergency department from carbon monoxide poisoning. Carbon dioxide is dangerous because it has no odor, color or taste, so it sneaks up on people. The most common symptoms of CO poisoning are headache, dizziness, weakness, nausea, vomiting, chest pain, and confusion. Poisonings occur more often in the winter, particularly from the use of portable generators during power outages. People can protect themselves from carbon monoxide poisoning by using monitors that cost less than $50.

Most investors focus on monetary policy and changes in interest rates. When the FOMC increases the Funds rate the majority of banks increase the Prime Rate on the same day. Many business and personal loans are tied to the Prime Rate. Home and auto loans are all based on an interest rate, so everyone has been trained to monitor the cost of money. Lending standards are a lot like carbon monoxide since they operate in the back ground. When the Senior Loan Officer Opinion Survey (SLOOOS) showed that banks significantly increased lending standards in the third quarter, no one on Wall Street noticed. I referenced this oversight in the January Macro Tides. “A large increase in lending standards is a really good recession indicator. A decline in the availability of credit is more restrictive and problematic for the economy than increasing the cost of credit. In the third quarter banks increased lending standards to a level (Above 20%) that presaged the recessions in 1990, 2001, and 2008. I listen to CNBC all day and I have yet to hear a single ‘expert’ mention the increase in lending standards in the third quarter. Instead, the ‘experts’ say the economy is holding up and any recession is likely to shallow.”