Lately I have seen reports about declining loan growth and that this might be a sign of credit crunch or that it may cause a recession. What I do not understand is why a declining loan growth is so bad? The number is still positive (ie the total amount of loans is actually increasing, just at a slower rate). Should you not expect a contraction of loans when the private sector is delevering? I understand that loan growth has to keep up with demographics (as the number of people is increasing the amount of loans must increase at the same rate to keep balance sheets constant) and with GDP (as we get richer we get more equity and loan growth has to keep up with the growth in GDP to keep balance sheets a constant leverage ratio) but why is a declining rate of loan growth so bad now if we expect the private sector to delever and GDP is sluggish at best?QuoteFederal Reserve Chairman Ben Bernanke and other policymakers were warned that rising mortgage foreclosures are likely to get worse, as the central bank on Thursday reported the slowest pace of loan growth in four years.I understand that I am missing something here and would very much appreciate any comments or help. Thanks a lot!

Their concern is that if people can't (or won't) borrow money to buy houses, then housing prices and housing sales will decline further. If housing prices and sales fall further, then more people will end up in a distressed or foreclosed situation. At some level, the decline in the growth of borrowing is analogous to the end of a Ponzi scheme -- if there aren't enough new borrowers to pay-off the lenders to the old borrowers, then the scheme goes pear-shaped.Personally, I'm shocked that the loan volume hasn't declined significantly. Consider this situation in which someone owns a $250,000 house with a $200,000 mortgage, then the house loses 20% of its value, then the first buyer sells the house for $200,000 to someone who gets a $160,000 mortgage. This example illustrates how declining prices should lead to negative loan growth. The only way that loans can grow whilst prices drop is if the LTV ( loan-to-value) grows significantly. That's not good because it implies that low-LTV owners (e.g., those that have held housing for a long-time) are selling while recent buyers are being held captive by under-water mortgages. The result is a growing bulge in the number of underwater, distressed, and near-underwater loans.

Hi Traden4Alpha! Thank you very much for your answer. However, I still a bit confused (I am not very familiar with macro so bear with me..). You say that: QuoteTheir concern is that if people can't (or won't) borrow money to buy houses, then housing prices and housing sales will decline further. If housing prices and sales fall further, then more people will end up in a distressed or foreclosed situation. At some level, the decline in the growth of borrowing is analogous to the end of a Ponzi scheme -- if there aren't enough new borrowers to pay-off the lenders to the old borrowers, then the scheme goes pear-shaped.I agree that a fall in the level of loans would put downward pressure on housing prices. However, if the level of growth remains positive albeit lower would that not just imply less bit still positive pressure upwards on housing prices (on a very simplified level)? My understanding is that if you have an economy with one commodity (eg houses) then a zero loan growth would imply zero increase in the price of the commodity (a negative loan growth would still mean that there is more money that can be spent on houses pushing the price upwards whereas an actual decline in the level of loans would mean that houses prices should be falling, again on a very simple level of reasoning). As you state later housing prices have indeed fallen so we would expect a decline in the volume of loans (and not just a fall in the level of growth) unless people are levering up again....Or is the Fed perhaps worried that if you extrapolate a declining loan growth you sooner or later end up with a decline in the actual volume which may push prices downwards? But if loan growth is still positive that means that there is no delevering of the households (at least not from that data, they may have credit cards etc that may show up in other statistics) instead we are seeing a relevering since house prices are falling (as you said)? I am just trying to understand the basics of this because I had a conversation with some people about this and no one seemed to be able to give me an answer to how you should look at this. Most grateful for any comments. Thanks a lot!

You are right that the level of loan growth required for stable housing prices would be zero under ideal conditions. But that only applies to a well balanced economy and in the absence of population growth, new home building, inflation, and friction in real estate (e.g., the fees associated with mortgages and buying/selling homes). Population growth, new home building, inflation, and friction in real estate would all put a positive bias on the required rate of loan growth needed just to hold prices stable. I would imagine that the Fed et al have models that estimate the required threshold for a positive growth rate needed just to maintain price stability.Moreover, the U.S. economy has not been balanced in the sense that a rather significant fraction of GDP (about 5% to 10% in my estimates) was coming from loan growth -- for the past 10 years or so, consumers have used credit cards, consumer loans, and cash-out-refinancing to pay for a significant fraction of their consumption. Rolling the loans and borrowing more to maintain GDP has required significant growth in loans. In this imbalanced economy, the end of a high-rate of loan growth is the beginning of privation.Whether households are leveraging up or down is much much more subtle than the aggregate data suggest. The bigger issue, with respect to housing prices is the effects of marginal actions -- only the people who are considering or actively participating in buying or selling real estate affect the prices of houses. The issue is that the country is not a homogenous population of average consumers with an average LTV and an average tendency to buy/sell/foreclose on their house. Rather some folks have a 0 LTV (i.e., no mortgage) and others have a 140% LTV (i.e., an upside down mortgage), some folks have stable jobs and others have lost their jobs, some folks live in distressed areas with rampant foreclosures and vacancy rates and others live in places where prices haven't dropped. All of these factors affect whether specific individuals will be buyers or sellers, whether they will seek or be forced to change leverage, and whether they will negotiate stronger or weaker prices. It is home buyer's ability and willingness to take on leverage that matters on the local demand side. It is the home seller's desperation or financial strength that sets for-sale inventory and housing price firmness on the local supply side.My biggest worry is that a significant fraction of the loans are bad but have not been recognized as such. Moreover, the two processes of refinancing and ongoing home sales have the effect of distilling good borrowers out of any given pool of existing loans to leave an extremely toxic residue. Banks that are not or cannot write new mortgages will see their existing pool of loans become increasingly toxic.

Bubbles cannot be stable: they can only grow or burst. If a bubble is not growing quickly enough, it maybe about to burst, which definitely worries its inflators.

QuoteOriginally posted by: OblezinBubbles cannot be stable: they can only grow or burst. If a bubble is not growing quickly enough, it maybe about to burst, which definitely worries its inflators.Exactly! A bubble is a self-generating Ponzi scheme -- without an influx of fresh foolish capital to maintain upward price momentum, prices revert (often violently) to more fundamentally appropriate levels.

history is cyclical

QuoteOriginally posted by: Fdloanshistory is cyclicalEspecially those Vico cycles.