[riggins]

Low interest rates make consumer loans more affordable, not more accessible.

When a loan officer decides whether to approve a loan, they look at the collateral and whether the borrower can service the loan payments. A lower interest payment absolutely makes it easier for borrower to service the payments, and hence for a bank to justify a loan. Ergo, lower interest rates makes loans more accessible.

Also your claim is contradicted by the survey I posted. For the last few years the NFIB survey has consistently returned the same results: access to financing is not a big problem for businesses.

The evidence doesn't support the claim that the problem is the banks.

BTW, this is true not only for the US, but for other economies as well. The exact same thing happened in Japan in the 1990's.

If there are other ways for a bank to use their cheap money

I haven't looked recently, but the last time I did banks had excess reserves and the Fed was debating whether to charge banks for depositing money at the Fed. Again, basically the opposite of what you're claiming.

SWAG. You believe in Austrian economics?

[psaintla]

I think you're missing out on something fairly basic. About 15%-25% (depending on which survey you trust) of small business loans were in the form of HELOCs (Home Equity Line Of Credit) pre-housing bust.

Banks no longer want to take risks on HELOCs so the qualification standards for getting them are pretty insane. As a result, business owners who used HELOCs as a way to deal with seasonal changes in demand or just as a way to have funding to get a business off of the ground no longer have that option.

See http://www.clevelandfed.org/research/commentary/2010/2010-18...

[gpos]

Actually, economist Joseph Stiglitz has written about the theory and existence of "credit rationing," i.e. restriction of loan supply by banks due to trouble distinguishing between "good" and "bad" borrowers. In sufficiently tough economic times, the proportion of "bad" borrowers is high enough (and the cost of distinguishing "good" from "bad" is also high enough) so that banks simply restrict credit. Here's a link.

http://pascal.iseg.utl.pt/~aafonso/eif/pdf/crrinf81.pdf

Austrian economics is great, but it often doesn't take into account that information neither free nor perfect.

[spikels]

You appear to think you understand these rather complex issues. I am skeptical that anyone does.

So why are there fewer new businesses if it is not financing?

[riggins]

You appear to think you understand these rather complex issues.

Let me address this first. The initial claim that I replied to was that 'low interest were causing loans to be inaccessible'. That claim just doesn't make sense. I'm comfortable my claim that low interest rates makes loans more accessible is correct.

Beyond that narrow claim I'm not nearly as certain.

So why are there fewer new businesses if it is not financing?

Now this is an interesting question and one I don't know the answer to (and I haven't seen an answer too). That might make a good Phd thesis. A SWAG would be that its got to do with suppressed aggregate demand. I don't know if the data exists for Japan in the 1990's but would give you one data point. It kinda of makes sense that new business formation would slow during stagnant growth ... but the opposite could be true. People could be forced to start businesses because the conventional career path is less attractive. Anyway, I have to put this in the 'I don't know' category for me.

[iamthepieman]

Just to clarify I said that low interest rates don't make loans more accessible, just more affordable. I didn't say that inaccessible loans were caused by low interests rates. That wouldn't make any sense as you mentioned.

The Mortgage Credit Availability Index[1] is at around 115. If it had been tracked in 2007 it would have been at 800.

The chart you posted in a previous comment doesn't really address the availability of credit. It just says that businesses are not as concerned about financing and interest rates as other issues. In that same link it reports that 24% of small businesses were planning capital outlays and that 48% explicitly were not looking for a loan. I don't know what to make of that except that, it's not really addressing my point one way or another.

[1] http://www.mbaa.org/ResearchandForecasts/MCAI.htm

[nostrademons]

There are many other possible explanations for fewer new businesses:

1. Technology has disintermediated many of the barriers in bringing your service directly to customers, and so more people are becoming freelancers rather than working for an organization. I would love to see this chart compared to rates of self-employment, Kickstarter campaigns, and people who make their living off EBay.

2. We're in a cyclical depression in new business formation. The economy is still pretty sluggish; few people feel they can gamble on striking out alone under these conditions.

3. New businesses are either folding quickly (before the one-year mark) or getting acquihired, because technology makes the feedback cycle of whether or not an idea is going to work faster.

[spikels]

Seem like good ideas but none of the explain the decline of new business formation.

1. Despite EBay and freelancing self-employment has steadily declined from at least the 1970s[1]. I read somewhere once this has been go inning on for more than 100 years.

2. As shown in the main graph of the original post this has been going on since themid-1970s. So it's secular not cyclical.

3. The graph in the original post shows business "less than a year old" so they don't need to make it to the one year anniversary. So this is not caused by survivorship bias.

I also have a very technology focused worldview but we need to keep in mind while awesome and very important it is only a tiny fraction of US employment and GDP.

[1] http://blogs.hbr.org/2014/02/where-are-all-the-self-employed...

[hga]

I wasn't aware this would be predicted by Austrian economics, but I don't know enough of it/my study of it was back in the '80s. Could you be more specific?

However, what I generally understand is happening, or rather is not happening, is called "pushing on a string". No matter how low the rates or availability of loans (not so sure that was true in Japan in the '90s), nothing can get a business to borrow money if they don't think they'll be able to pay it back.

I'd also suspect that's somewhere in the priority list of central banks below preventing widespread bank failures (note what happened after it was decided to throw Lehman Brothers to the dogs, albeit we'd better be past that point in the US), and very possibly making it very cheap for the government to borrow money. "Trillion dollar deficits as far as the eye can see" don't hurt so much when interest rates are so low....

[riggins]

I think its mostly that Austrian economics focuses on the individual and rejects macroeconomics based on aggregate demand. What I really think is going on is not that people really understand Austrian economics and find it logically persuasive so much as they want some reason to ignore Keynesian economics.

However, what I generally understand is happening, or rather is not happening, is called "pushing on a string". No matter how low the rates or availability of loans (not so sure that was true in Japan in the '90s), nothing can get a business to borrow money if they don't think they'll be able to pay it back.

That's exactly right. And that's where a lot of economic theories break down ... because its assumed that firms always maximize profit. If you assume that, firms will always borrow money if money is free (i.e. 0% interest rate), and put the money to use earning >0%.

I think we've seen that's not a great assumption though because firms are not always maximizing profits.

[hga]

All too often it seems to maximizing egos ... until the firm's Long Night begins....

Going from first principles, the application of "macroeconomics based on aggregate demand" to the microeconomics of specific firms is always going to be iffy.

Zillions of factors, e.g. local demand, regulatory regimes, uncertainty of about the latter and tax regimes, current and future ... heck, I gather the Austrians don't entirely dismiss Keynes's animal spirits concept, they just have some explanations for it, which get harder to apply the more you move away from purely financial considerations.

E.g. if Main Street, these small and medium size businesses, conclude they've been declared Enemies of the People, the animal spirits of the people in them are going to be affected. Not to Godwinize this discussion, but I gather those of the school who survived did so by getting the hell out of Dodge (https://en.wikipedia.org/wiki/Richard_Ritter_von_Strigl#Late...) and that also critically disrupted the school. You can imagine how scholars felt when they discovered von Mises' archives in Moscow after the Cold War....