NEW YORK TIMES: …The paper is titled “Why Does Financial Sector Growth Crowd Out Real Economic Growth?” and it builds on past research that found that overall productivity gains were dragged down in economies with rapidly growing financial industries…
They found that financial booms were especially harmful to certain industries. Bankers, they say, act in predictable ways. They tend to lend money to projects with assets that can be pledged as collateral, such as those in real estate or construction. This is understandable — bankers want to be able to seize assets if a borrower gets into trouble on a loan, and they prefer those assets to be tangible.
But these industries are also among the least productive, and that leaves fewer dollars for more promising research-and-development start-ups that may have only intangibles, such as knowledge and ideas, to offer a banker as collateral. Even though such start-ups have far more potential than projects backed by tangible collateral, they don’t attract the financing they need… (more)
EDITOR: A few years after graduating from college, I walked into a branch bank on Rittenhouse Square in Philadelphia, chatted with the manager and, to start in business, borrowed $10,000 by simply signing a promissory note. It took about half an hour.
Just ten years later with our 264 unit apartment complex in the Wilkes-Barre area totally flooded out by Hurricane Agnes and theoretically insolvent having guaranteed the mortgages, I walked into a Wilkes-Barre bank and signed a promissory note for $50,000 and was told to come back for whatever else we need to get reconstruction underway.
Twenty years later during the real estate panic in the late 1990’s when our company had grown into a major owner of moderately financed real estate across three states, I was suddenly advised by the major Lancaster bank that our line of credit was cancelled until we posted collateral to support it.
Today even senior vice presidents can’t lend a dollar without obtaining approval from headquarters.
So when I had nothing, banks would lend on sheer potential. They backed branch managers’ judgment. In more recent times, all banks care about is collateral. Banks aren’t going to run any risks. (Especially when they can borrow from the Federal Reserve for virtually nothing and then buy Fed “T” bills and enjoy a profit on the interest they earn.)
We switched to a statewide national bank. And we do have a substantial non-collateralized line of credit today (which we rarely use.).
But what are young people with good ideas to do these days? I guess the answer is to find work in the financial industry.
