As the Federal Reserve pursues its quantitative easing strategy to boost economic growth, the initiative is blunted by many executives too cautious to borrow some of the cheapest money in generations.
Businesses are telling their bankers that they are beset by uncertainty. No doubt, a financial near-death experience is harrowing enough that you don't forget it in just four years.
It's part of the reason why recovering from the recession takes so long. Memories of the financial crisis of '08 recede slowly.
But the Federal Reserve is pushing to get businesses past their psychological traumas through the purchases of mortgage-backed securities, which will inject more money into the financial system so, among other things, banks will increase lending.
And new borrowing, of course, will fund consumer and business spending that leads to employment growth. Or will it?
On the lending side, bankers say they already have too much money for lending, and rates can't go much lower. What they really need are more good borrowers.
"We can get more money than we know what to do with," said Brad Krohn, chairman and CEO of the Business Bank based in Minnetonka.
Ben Crabtree is a longtime banking industry analyst now serving as senior adviser to the investment banking firm Oak Ridge Financial. As the Fed injects money into the system, Crabtree says, the "velocity" of money -- the way dollars turn over in economic activity -- has fallen. And the new money is not showing up in new loans, he said.
"It all relates to confidence," Crabtree said.
It certainly isn't the cost of the money, because the prime rate has been 3.25 percent since December 2008, the lowest it has been since August 1955. Several bankers said the interest rate for a loan isn't even a significant factor to a borrower.
What's more telling is the behavior of businesses that have been approved for loans and have an existing line of credit. No one can blame unused lines of credit on tighter underwriting standards or regulatory pressure, because borrowers can get that money by placing a phone call or clicking a mouse.
Krohn said that, at his bank, growth on approved lines "is just stagnant."
Bremer Bank saw credit line usage peak at over 50 percent in 2008, and it fell to 28 percent after the financial crisis, said Kevin Powers, a Bremer group president.
"Line usage is back now in the mid-to-upper 30s," Powers said. "The challenge we have is finding qualified borrowers, and qualified borrowers who want to take on debt."
The uncertainties cited by borrowers seem to be in two buckets, said Ron Feldman, the senior vice president of supervision, regulation and credit for the Federal Reserve Bank of Minneapolis.
One bucket is for all the complaints about government policy, such as the unknowns of health care reform or whether taxes will increase as fiscal policy evolves.
The other bucket is for purely economic worries, and it was Feldman who used the term "semi-near-death experience" to describe what happened to many business owners during the worst of the financial crisis. Sales fell, cash flow evaporated, and companies could not shed costs fast enough. And owners who had relied on bank debt or had other short-term obligations were suddenly staring into a deep hole.
It was personal, too, because in the smaller-company lending market there really isn't such a thing as a purely corporate loan. Banks almost always require principal owners to sign personally. And if you have ever signed one of those, you know how sobering that can be.
"It makes purely simple common sense," said Chuck Mueller, the president and CEO of Fidelity Bank in Edina. "If I went through the hell some of these people went through, I wouldn't be so quick to take on a speculative inventory position, not knowing how fast that inventory was going to turn. Or invest in a piece of equipment."
The financial histories tell of survivors of the Great Depression who never recovered their swagger. Then there were people like Sewell Avery, who had led both United States Gypsum Co. and Montgomery Ward & Co.
Avery crops up in the writing of James Grant, the editor of Grant's Interest Rate Observer and a credit market commentator. Grant wrote that in 1933 Avery's U.S. Gypsum was rock solid. Equity comprised 98 percent of total capital, and current assets were 14.5 times greater than current liabilities.
But Avery never adjusted to the post-World War II boom. He stood ready for the next depression as cash piled up at Montgomery Ward. Sears, Roebuck and Co. quickly took over industry leadership.
There is an argument to be made for taking more of the cheap capital offered by banks and make the Fed's quantitative easing policy actually work. You don't want to be another Sewell Avery.
But it's also easy to agree with the point of view of Dan Raleigh, president of Lake Elmo Bank, who gently disagrees with the notion that sluggish lending is a product of "overly cautious" borrowers. He said their hesitance is simply good business.
"I would just say they are being responsible," Raleigh said. "If they knew they could make money with the new machine, they would buy the new machine."
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