Excess Liquidity

What is Excess Liquidity?  It’s a term that banks or other financial institutions utilize to talk about too much money or capital chasing too few deals.  It’s an interesting phenomenon.

The last time we had this , was in 2006 and 2007 before the economy deflated.  There was a lot of investment money in 1) Hedge funds 2) Private equity 3) Commercial banks buying business assets.  Loan restrictions were relaxed and loans were given to people who normally don’t qualify ( subprime) ; businesses with bad balance sheets; governments with high debt ratios and speculative economies ( Greece).  Of course the economy deflated and many people have loss their homes, businesses have closed , and governments are in difficult fiscal shape.

The current situation is different.  The Federal Reserve has zero interest rate on its monetary policy in lending to banks which means banks have an incentive to lend since their margins (on loans) will be large, the spread between what they pay out on savings and CD accounts and on the loan balances.  Recently bankers have told me they now have cheap 5 to 6% financing on asset backed loans ( collateral or hard money loans); 6 to 7% financing on SBA loans even for startups (but must be well collaterized with experienced managers).  The credit markets have started to thaw and are now moving from the most credit worthy to the more subjective credit worthy.

I don’t expect  the days of stated income loans to become prevalent again as the underwriters (bank gatekeepers) have tightened their requirements but I do expect this capital to be eventually deployed.  The worst case would be for all these lending institutions to hog the money and bury in the ground.  Reminds of that Biblical proverb about the 3 sons.  2 sons went out and made money with the funds their father gave them.  1 buried it and kept it safe.  The father chastised the 1  that buried the money with squandering their resources.  Right now, the banks are trying to become like the 2 sons but there a lot of naysayers out there spooking the business community from investing.  Let’s hope our leaders provide the confidence and guidance to correct this investment climate.