Too tight?

Some argue that one of the reasons for the relative slow economic recovery is that banks and other lenders still have very high standards that simply prohibit many from getting a loan. Since our economy revolves around credit, if borrowing is limited so will be economic improvement. Is this a valid issue? Host Mary Walden asks her husband, NC State Economist Dr. Mike Walden.

Mary, this is a big issue. There is no question that lending standards are much higher than they were prior to the recession. Although I should say they are getting a little more lax recently.  And, there is also no question that if you keep someone from borrowing money, at least in the short run, that’s going to adversely affect economic growth. We’ve seen this, for example, in the housing market.  Now, some of the tightening of lending standards is purposeful. We’ve had some new legislation that has looked at what we had before the recession, where we had very lax lending standards and said, ‘No, we can’t go back to that; we need to have tighter standards.’  Some of the tightening also is simply due to the recession lenders realizing that they got burned on being too lax prior to the recession. And, you can also make an argument that if you look at recessions over time they generally are preceded by a period of very lax lending where debt has built up.  So, I think there is a reason for tighter standards. Clearly though, it is having an impact on economic growth. And, of course, what the bottom line here is a balance of economic growth and long run stability.

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