Thursday, May 16, 2013

Smaller Corporate Borrowing Is Good For Economy

Recently in a Wall Street Journal article by Dan Fitzpatrick and Shayndi Raice, the topic of smaller corporate borrowing was covered. The article has a negative tone towards the results of such activity for banks and the economy as a whole. But a couple of critical points are missing from the article.

The article stated that one of the reasons corporations are not borrowing is because of the fact that they have massive amounts of cash on their balance sheets. It is almost inconceivable that corporations would not borrow at these rates. It could mean that corporations feel that the growth from using their own cash will serve investors better than going into debt to do the same thing.

When was the last time banks were passed over to do their job? The government has almost literally handed them cash to lend. Even though standards have been raised, there were enough corporations and individuals that enjoyed the qualification and received extremely low rates when they borrowed.

This is all good news. For one, the fact that corporations are hemoraging cash on their balance sheets will get investors hungry for more growth and higher yields on their ownership. It has to get out somehow. The banks now will be forced to loosen the purse strings a little bit on new corporations and individuals that might not have the greatest credit. It's about time.