Did Demand for Credit Really Fall?

One standard attack against banks is that they have not expanded lending sufficiently to help the economy recover. The standard defense has been that the supply of credit collapsed only in response to a collapse in the demand for credit. The primary measure of demand for credit that I know of is the one compiled by the Federal Reserve by surveying bank lending officers; it shows falling demand for all types of credit from 2006, with an acceleration in the fall in late 2008.

Presumably this is based on the number of people walking into bank branch offices (or calling up on the phone, or applying online, etc.). But Google has another way of tracking demand for credit; the Google Credit & Lending Index measures the relative volume of searches* for certain terms like “credit card,” “loan,” and “credit report.” There’s some seasonality there, but in general the levels look higher in Q4 2008 and Q1 2009 than in Q4 2007 and Q1 2008.

There are a couple of plausible reasons for this discrepancy. One is that this is a silly index and should be ignored. The other is that people wanted credit just as much (or more) than before the crisis, as measured by Internet searches, but they couldn’t find it online (because fewer providers were advertising, or the terms offered weren’t as generous, etc.), so they didn’t bother going into the branch (or calling).

I’m not going to be able to resolve this here, but it comes down to which you think is a better source of information: bank officers judging based on their impressions of incoming activity, or people sitting at their keyboards searching for “credit cards.”

* Relative to all Google searches, so numbers might be affected by seasonal or other patterns elsewhere in the world; for example, as shopping-related searches go up in December, everything else might see a (small) corresponding decline.

By James Kwak

32 responses to “Did Demand for Credit Really Fall?

  1. In a spirit of helpfulness, rather than arrant pedantry, I mention that you might wish to correct, “to resolve this hear” to read “here”.

  2. It’s an interesting gauge (search numbers). I’m not sure what to think of it really. Kind of a quandary. I think there’s something valuable to sift through there—but how much weight to give it? On the other side of the coin, would the loan officers have something to gain by portraying loan demand as low (public relations)?? Other than “Bill Moyers Journal” TV program, I never see people being thrown out of their homes on TV, yet we know it’s happening on a large scale basis.

    I think a gauge like that (searches) will become more accurate as society modernizes and is definitely worth more study. That would be a good business to get into (Tabulating those numbers and selling them as a market research tool). Would be a good business for someone young and knowledgeable in software if he didn’t know Google had a monopoly on that information.

  3. James Kwak,

    “Presumably this is based on the number of people walking into bank branch offices (or calling up on the phone, or applying online, etc.).”

    Presuming facts not in evidence. Did you read the survey? It was sent to “senior loan officers” and responses were received from “57 domestic banks and 23 U.S. branches and agencies of foreign banks.” The 57 domestic banks represented $6.3 trillion in combined assets. These weren’t the “personal bankers” sitting at desks across from the tellers.

    In addition, the survey included commercial and industrial (C&I) loans, commercial real estate (CRE) loans and the effects of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act. Not the kind of data that springs from “the number of people walking into bank branch offices (or calling up on the phone, or applying online, etc.).”

    The Federal Reserve Board takes these things seriously. You should too.

  4. Luis Enrique

    When it comes to demand for credit, how do we tell the difference between people with good investment projects (or just borrowers capable of repaying) and firms to whom the bank would be nuts to lend to, but are desperately seeking credit just to keep the wolves from the door a while longer (and going from bank to bank, registering as ‘demand’ each time, as opposed to getting a loan at the first place they ask). I’d have thought the quantity of the latter might increase in a recession, and that without knowing both credit quality and duplication, gross ‘demand for credit’ data is hard to interpret.

  5. “Correlation is not causation” is always good to keep in mind when looking at data like this, but I’d definitely say it warrants further research and looking in to. I have to admit that my own (statistically insignificant anecdotal) evidence is that they sure have continued to push credit on people throughout the crisis. I’ve received offer after offer for credit cards to me personally. On relatively favorable terms, I might add.

    My credit has been repaired from “couldn’t borrow a pencil” (I was irresponsible in my late teens-early 20s) to a score over 750 and no black marks left thanks to a little negotiation, so I might be the exception to the rule in this case. I’m not really sure what to make of all I’ve seen. They’ve still been willing to lend money to ME throughout the crisis though.

  6. Resumption of tougher underwriting standards could possibly account for both data points.

    Less people will seek a traditional loan if they expect the terms to be onerous, the documentation requirements high, and perceive a high possibility of having their application rejected. Getting a loan is a pain, so less people seek them as preferred option for their funding needs.

    As a potential borrower, I know that qualification is going to be more difficult than it was 3 years ago. I need to do more research and watch my credit score. More web searches for me.

    There are plenty of people looking for loans, but the message has got out. The products that allowed janitors to buy million dollar homes don’t exist anymore. It doesn’t stop people from looking.

  7. It is very hard for financial doers in the real economy to credit these statistics even if they are valid without an understanding of the many contributing factors. In my business , we needed to bring around $1 bn – $1.5bn of new construction contracts into the house each year. That meant pursuing around 10 times that number of projects up for negotiation ignoring the marginal contracts and marginal producers. ( Our business is cost plus a fee with a guaranteed maximum price… ” GMP’s”) These projects are out there but everyone contemplating new construction projects is very concerned about increased equity requirements and general tightening of the bureaucracy of credit involving C&I. Our business was relatively light on development projects and excluded housing entirely. Yet, the work out there for negotiated construction is down considerably.

    There is a chicken versus the egg aspect in play . Potential new project investors are fearful of credit itself and fearful about the timing of their projects.Especially, there are far fewer corporate and retail projects being pursued. These projects are awaiting better conditions. In short, fear drives almost everything. The banks are being asses and the C&I project owners are risk adverse. Accordingly, they want more bonding and L/C’s they will not pay for. That is the contractor is squeezed. The banks are risk adverse with respect to the project owners. We have the financial doers involved at all levels engaging in CYA. A merry go round.

    Being risk adverse is a major disease. Of course, everyone has been risk adverse in the past to the point of creating risk shedding devices. These risk shedding devices have now failed and the financial system , in reality, must contemplate going naked on risk. What they do going forward is on their head and that makes everyone involved very nervous about proceeding on projects.

    US finance engaged in the illusion that individual risk could be entirely shed while earning the bulk of the revenues associated with higher risk for a very long time. Now these people must put up or shut up on risk. Many choose to stand down and await developments. This is an attitude that will take quite some time to burn away.

    Would you build a new $40 million anchor store in a prestigious mall? Or for that matter given health care in Congress, would you go on the hook for expanded health care investments when your cash flow over the recovery period are being played with by a dysfunctional Congress?

    The problem is many faceted and bank credit attitudes are only a facet. Is US confidence at the real economy level mortally damaged?

    Our problem was even more damaged because much of our work was in ” pay when paid” states. Thus , our subcontractor’s faced potentially fatal inability to collect their receivables in the past year or two. All were hurt. Everyone knows this especially bankers and those that write bonds and performance L/C’s.

    So, it is easy to see why business is down by half for a lot of the participants.

    The astute players in the real economy now understand that laid off risk is mostly not possible because if there is a payoff it is likely the whole system fails. CDS’s involving TBTF’s means it all comes down unless the Federal government makes good the hit arising from an insured event trigger. That is the lesson of AIG. The TBTF’s have so much of the action that a failure of one is a failure of all.

    So the whole risk edifice stands on the ability of the Federal Government to make good because the ultimate lay off bookie is the USG. The real world understands the insurance cost verges on the worthless. So, TBTF must end or risk shifting has been rendered worthless after a generation of risk shifting being the Holy Grail. Bad habit breaking makes everyone cautious. Kills confidence during the withdrawl period.

  8. Luis,

    You are right. Credit quality must be factored in.

    The Federal Reserve Survey mentioned above does not include information about borrower “quality” with one exception. Beginning Q2 2007 residential mortgage loan demand is reported for Prime, Nontraditional and Subprime.

    The Google report has no credit quality information. It would be reasonable to postulate that searches for lenders would go up if interest rates go up (can I get a better rate somewhere else?) or if the economy sours (I’d better re-finance before I lose my job). In neither case would real demand go up.

    If you play with the numbers looking at loan demand, loans made and changes in credit standards you may be able to infer creditworthiness of loan seekers.

    Since banks are required to take a loan application and do the underwriting before making or declining a loan, they should have the data. I’m sure that responsible senior managers at most banks use the information.

  9. My college’s survey of CFO’s in south western Louisiana (http://www.moody.louisiana.edu/joomla/index.php/cfo-roundtable/211-acadiana-cfo-rountable-survey-results) shows that they are pessimistic about business prospects, but they have seen their access to credit increasing and their interest rates are dropping. That means that my survey is consistent with the Fed data. These results are consistent with the story that the demand for loans is driving the drop in lending.

  10. Also, note the vagueness of the google chart: terms like “credit card,” “loan,” and “credit report” “and so forth”. What’s included in the “and so forth”? Bankruptcy? Default? These things are also increasing, and people may be looking for information on them. Also, not shown: how does this chart compare to demand surveys historically? Was there correlation in the past?

  11. A small portion of people who desperately need but cannot get credit can easily distort the Google index by keeping searching “credit”. I just don’t see how that index can be a helpful indicator of aggregate credit demand.

  12. “It comes down to which you think is a better source of information: bank officers judging based on their impressions of incoming activity, or people sitting at their keyboards searching for ‘credit cards.'”

    Ask a lending officer about their sales quotas/hurdles. You’ll probably find that bankers quantify everything and that the information they are providing is slightly stronger than an “impression.”

  13. Fed: “In the October survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households. However, the net percentages of banks that tightened standards and terms for most loan categories continued to decline from the peaks reached late last year.”

    We might replace the “However” that starts the second sentence with “Therefore”.

    There is a basic problem with this research. Demand is “the desire of purchasers, consumers, clients, employers, etc., for a particular commodity, service, or other item : a recent slump in demand | a demand for specialists.” If you want to measure that desire, ask the people who have that desire, not the bankers. The number of people who come through the door of the bank depends upon other factors than demand.

    Question: If demand for credit is falling, why are standards and terms being tightened. (For the public, that is, not for the bankers, to whom “to each according to need” was the operative principle.)

  14. The best sources of information about demand for credit are the people and businesses who NEED(ED) to borrow money: (1)People who lost their jobs and ultimately lost their homes, cars, businesses, and other assets, because they could not get loans to help cover their expenses. Banks refuse to lend to people without jobs, or any collateral for the loans. The demand cycle flows both ways. People without jobs know they can’t get loans, or ultimately give up trying. Banks typically won’t lend to people or businesses which represent high risk.

  15. Kwak is grasping at straws.

  16. I’m not an economist and don’t know what questions the Fed asks in its surveys. But how is it that the anecdotal evidence, uncovered by the media in markets throughout this country, overwhelmingly indicates that small businesses everywhere are being denied credit or having existing credit reduced or withdrawn? I understand that bankers who fill out these surveys may have a vested interest in extending credit, but they have an overwhelming vested interest in not contradicting their bosses who claim there is a lack of demand while continuing to suckle at the government teat.
    Who do I believe? I believe the independent business people who contend that the lack of access to credit, even credit that preexisted the crisis, is driving them out of business despite the fact that there has been no material deterioration in their credit quality. It is one thing to take a risk with a client who has a real business and a decent track record. It is another to gamble on bonds consisting of mortgages that didn’t have a prayers chance of being repaid. Learning not to invest in the latter does not require not continuing to invest in the former. In short, why should anyone ever believe bankers even though most are dependent upon our largess these days..

  17. Why would most people even desire to buy or borrow in the last year or so? There has been nothing but hysterical ignorant mass rantings about evil pernicious deadbeats since the subprime crisis erupted. The media has been filled with nothing but doom.

    I shopped for a topcoat this weekend at a high end clothing store. I got into a discussion with the sales clerk about the debt crisis. This young man was an ardent Reaganite who insists that the libs forced the banking system to make loans to the poor and down and out to force socialism on America. He is utterly convinced his conclusions are based on hard fact. This is hardly a minority view in my state. It might even be dominant.

    On the other side of the coin a senior project executive I used to work with told me recently about just how high handed the operating people at a certain TBTF bank can be. This bank has a $200 million loan out to a developer. In the view of the bank the value of the project has decreased and they want more capital put up by the developer. To wit, $10 million. Well it so happens the general contractor billing for the month was not paid timely. The TBTF bank refused to fund the payment. The project is very near the point where the General Contractor could secure the Certificate of Occupany but need not do so for several months. Pressure was put on the idiot at the bank who then funded the loan and immediately took it back by grabbing the bank account of the developer. The monthly payout was not possible. Here a visit from Tom Hagen was required with the threat that Lucca Brazzi would be unpleasant to Banker Woltz. Tom Hagen’s threat was that only the contractor may secure the Certificate of Occupancy and the contractor had a number of months to secure the Certificate of Occupancy. In the meantime, the contractor would coordinate the filing of mechanics liens. There would be at least 100 subcontractors with at least 300 second tier subcontractors filing liens. The Lucca Brazzi angle would be the meticulous coordination of lien filings forcing delay by the city in the issuance of the Certificate of Occupany. It took ten days but the bank restored the developer’s bank account and everyone was happy until the next time.

    Next time, the general contractor begins asking for retainage paydowns. There will be endless drivel from TBTF bank.

    This kind of nonsense occurs everytime there is a credit panic and bank bureaucrats start getting wet diapers. This was very commonplace during the melt down of the early nineties. It was commonplace in the early eighties.

    In short , to be expected from bankers as a normal consequence of their fright.

    One of my jobs was figuring out devious ways to deal with bankers in such situations.

    Statistics is simply unable to factor in CYA and operating gibberish thrown up by panics. That is the human element.

  18. markets.aurelius

    Year-on-year (YOY Change) has more information than the outright levels. If I’m not mistaken, this google site has other stats that also are illuminating — e.g. mortgage inquiries.

  19. Did not read all the responses in detail…what about people searching for help and advice because they are in credit trouble?

    I find the baselinescenario quite insightful. Posts like this dilute the value.

  20. Geez, did I misread that second sentence. :(

  21. I have a slightly different perspective. I am an entrepreneur who has recently acquired a business which is necessary to execute our business plan/vision. To execute this plan, in addition to our own money, we need a $500K infusion to execute our business plan.

    We could have gone to banks to execute this plan, but we decided not to. Not because we couldn’t, we certainly could have, but instead because there are certain, strategically placed people who have cash in the amounts we need and who are strategically better placed to help us then banks would be.

    Maybe it isn’t a huge percentage; I don’t know and I can’t tell, but I believe there are others like ourselves. People who can go to individuals who have funds to invest and who are strategically well positioned to aid businesses in monetary and non-monetary ways; who can provide funding that in previous generations only banks could provide.

    My point is that, there are many funding sources other than banks and for people who can access these individuals; they provide financial funding and non-financial benefits that makes it more beneficial to go to them as opposed to going to banks.

    I’m not an economist, but as an entrepreneur, I believe there are alternate sources of capital that bring more value than cash alone. Part of the reason banks have seen a drop in lending is that businesses have found it more valuable to reach out to these sources as opposed to banks.

    BTW – as much as my partners and I admire Simon, as entrepreneurs, James is our hero.

  22. I picked up on that too. One of the issues with relying on “Spellcheck” and not on human proofreading. Note: I write a lot and can’t rely on proofreading my own writing. I think I am convinced (subconsciously) that I am error-free!! (No matter how many times that is proven incorrect.)

  23. I think that neither is an accurate guage of the desire for credit, either personal or business. First, I have heard of the nightmares of small business borrowing, and if we multiply that with a general conviction that, if the economy is basically flatlined, small business may not do very well and the borrowing may be risky at best, or they hear about the SBA complex application process and decide it’s just not worth it. Also, there are many non-traditional lenders out there who aren’t tied to the Fed. As for the Google issue, those key word searches may not turn up nearly as often. Most people, myself included, will Google logical sources and not keywords. Key words just get too many returns (i.e. “credit card”: 209,000,000, “credit report”: 118,000,000, and “loan”: 161,000,000) and this just doesn’t work well. If I’m a small business owner, I will go to my accountant or chamber of commerce, my personal bank, or a business friend before I Google anything. Individually, I am cutting up all the cards I can do without.

    Actually, the banking industry, by most accounts is only loaning to AAA risks, and the examiners are telling them to do so. The TBTF’s are not lending, except to huge, viable, active customers.

  24. One thing that could really make those search numbers skewed is different people and firms need different amounts of credit. When someone who is pondering buying a $175,000 home decides to keep renting, it’s a much smaller amount than when Steve Jobs decides he’s not going to make more Apple retail outlets because sales are down. So depending on the wealth of the person/firm and size of aspirations, using a search count to gauge credit demand might produce some very misleading indicators.

  25. Consumer/small business (one and the same in most instances, now, with disappearance of CIT and Advanta from the marketplace in past 18 months) credit card lines are being eviscerated by Wall Street lenders as we speak. Roughly 25% of all available credit has been removed from the market place in the 18-mo. period, June ’08-December ’09. Another 25% is expected to be cut during 2010. So, roughly HALF of all available consumer and small business credit (approx. $2.4 trillion) will be gone, baby, gone by the end of this year, in comparison to 30 months ago.

    As a result, “utilization rates” [the amount of credit actually used by consumers/small business, as a percent of what’s available to them–the folks that still have credit available to them, of course] is skyrocketing, thus having a negative effect upon their credit scores, since utilization % is one of the most important variables used in credit scoring, today.

    In effect, the government’s “G19″ information doesn’t even begin to scratch the surface of the real story, which I’ve summarized, above.

    One of the most interesting-yet-obfuscated indicators that this, indeed, is happening (above and beyond what I reference as sources, below) may be found in the bottom lines of the now-massively-expanding Rent-To-Own industry here in the U.S., today.

    Effectively, we’re seeing the subprime and “B” credit segment of the population being forced into these payday-loan-like, usurious options because they have no place else to go. (I’m told this reality is very much like retail lending in parts of Europe, where Rent-to-Own has been more widely utilized than it has been here in the States, up until the past year or two.)

    Sources for this info include: Meredith Whitney, Zero Hedge, publicly-available quarterly reports from major rent-to-own firms, and my own experience, running a small software company that processes consumer credit applications for retailers throughout the U.S.

    Additionally, as Naked Capitalism has reported it, the widely-stated “belief” that “consumers are saving more” really is more myth than reality, since it’s really all about the upper 10%+/- of the population that’s been socking away cash recently, while the rest of us are squeezed more and more, with every passing month, just trying to make ends meet.

  26. Rent-to-own, pay-day loans, auto-title loans and their bottom-fishing ilk are another sign that predatory lending is alive and well. Why isn’t this country investing say $100 million to establish community credit unions in low income neighborhoods to drive these predators out of the lives of those who can least afford them.
    I set up such a low-income federal credit union in the ’60s and it worked for years promoting small savings and small (“micro” in today speak) loans to those in need of short term cash, loans to replace failing appliances and loans to start businesses such as lawn cutting, snow removal, etc. It provided a road to freedom to many, saved money for all and the local peer pressure kept balances current. Where are the community organizers today, when we need them?

  27. The financial players have enormous stakes in the perceptions about these questions. Legislative action in active discussion. Executive action through regulators is always at hand. To assume that senior credit officers answers are not influenced by the official lines of their executive management, their own perceptions of the moral standing of actions they have already taken, or the threat of more transparency and perhaps marketplace consequences, is naive.

  28. It’s not clear to me that searches of the key words like credit can reasonably be equated to demand for credit; Google does not indicate, in this graph or accompanying information, the “click through” rate for these searches that might show whether a given search led to an application for credit. Indeed, this graph is probably skewed by people like the readers of these blogs who are interested in, researching, and writing about, the financial crisis but who are not presently seeking credit. If someone has a source for data on actual credit applications, this would be interesting and useful.

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  30. The biggest dynamic in determining and driving decreases in demand for loans – conveniently ignored by the right agenda sycophants and their sycophant media – is loss of employment and huge increases in under-employment. The Republican/conservative agenda of disappearing the middle class by exporting manufacturing jobs is almost exclusively responsible for drops in demand for credit. The purposeful under-reporting by sycophant media of job losses has also mightily contributed to obscuring this fact.
    The massive numbers of new under and un employed obviously are not lining up to get loans!
    The emperor has no clothes while the media is reporting this as a shift in clothing styles!
    Reaganite economic attacks on the middle class have finally defeated the biggest consumers of all time and destroyed economic growth – which comes not from Wall Street but from a now impoverished Main Street!. Wall Street is simply a mechanism for redistributing wealth from workers to the top 10% of income earners!

  31. Yes, I read the survey. And I know what all the categories are–I’ve posted about this survey in the past. “Presumably,” in my post, referred to the fact that I don’t know on what basis the “senior loan officers” answered the questions, which are simple questions with only three possible responses. The presumption had to do with the information they received that led them to make those responses.

    Businesses that want loans have to contact the bank somehow. Typically they call or email the bank officer they have a relationship with.

    Generally I don’t bother with comments like this, but I am getting sick of the snark. Try dealing with the issues instead of nit-picking at word choice some time.

  32. Thanks for your response.

    Your “Presumably … ” statement implies that a bank’s response to the survey was casual and imprecise. Your later statement, ” … bank officers judging based on their impressions of incoming activity.” reinforces this.

    The data supplied by banks is gathered carefully and systematically. While the Google Credit and Lending Index is also likely gathered reliably and systematically it is difficult to interpret.

    The averages for the Google index are:

    Q4 2007 1.04 +/-0.04
    Q1 2008 1.18 +/-0.04

    Q4 2008 1.08 +/-0.05
    Q1 2009 1.22 +/-0.05

    Q4 2009 0.98 +/-0.04
    (means +/- SD)

    Statistically this is a trivial treatment of the data but it’s a little better than looking at the graph.