The Impact of Loan Restrictions and Rising Interest Rates on the US Economy

The current value is at 5.25%-5.50% and the president of the Fed, Jerome Powell, has reiterated that there will be more increases before the end of 2023.

The Central Bank’s inaction for more than a year aggravated the inflation crisis in the United States, which in June 2022 reached a record of 9.1%.

It was not the COVID-19 pandemic that generated the price increase, as many media outlets and some experts aligned with the White House incorrectly repeat, but rather the economic course charted by the current administration.

The effect of the Federal Reserve’s response to inflation is being felt increasingly strongly among consumers and the American banking system, immersed in a crisis that has not ended, despite the silence of federal institutions.

Also almost unnoticed publicly, the government deposited more than $300 billion to prevent the crisis in the financial system from worsening.

What Washington has not been able to stop is the fear of the banks as they observe how a significant number of regional entities remain under the threat of bankruptcy and acquisition by large consortiums.

Signature Bank, Silvergate Bank, Silicon Valley Bank and First Republic Bank all went bankrupt in 2022. The first three were bailed out by the federal government and absorbed, while the fourth received a direct capital injection of $30 billion that 11 financial institutions disbursed; However, their problems do not end.

The dizzying rise in the prices of almost all products and consumer goods, services, insurance and other costs of living have generated chaos in the economy in just two and a half years of Democratic power: record and tenacious inflation for almost three years, a mortgage recession with 13 months of trading in collapse, a historic rise in interest rates, a contraction in manufacturing activity for 10 months, a record trade deficit in 2021 and 2022 of almost a trillion dollars , the number of job vacancies reached 11.9 million along with a labor crisis, in addition to the public debt that is approaching 22 trillion dollars and a crisis on the southern border that has doubled spending in Washington and state governments bordering Mexico.

In summary, the fateful consequences have been borne by the vast majority of Americans with a severely reduced standard of living and purchasing power well below traditional values ​​in the US for decades.

The worst victims: low-income families, retirees, students and the working middle class.

With visible benefits for large banks (as occurred in the government of Barack Hussein Obama), the transformation imposed by the current administration results in serious obstacles.

Drastic brake on loans

It is increasingly becoming almost impossible to close loans with banks, which have become reticent amid the current situation and forecasts.

“More Americans are falling behind on their mortgage, auto and credit card loans than at any time in more than a decade, an alarming sign of consumer stress as prices and rising borrowing costs compress the household budget,” indicates an article in The Washington Post.

There are 70 million more credit card accounts open now than in 2019, and Americans’ total credit card debt just surpassed $1 trillion for the first time, according to the New York Federal Reserve.

“The rise in delinquencies and defaults is symptomatic of the difficult decisions being made in tens of millions of households right now: whether to pay credit card bills, rent or buy groceries,” said Mark Zandi, an economist head of Moody’s Analytics.

Buyers turn to services buy now y payment later to cover basic needs such as food. Usage increased 40% in the first months of 2023 and the trend has continued, according to data from Adobe Analytics.

It seems very likely that the average credit card interest rate (already at a record high of 20.6%, according to Bankrate.com) will continue to rise.

Student loan payments that were suspended for more than three years will resume in October. And banks and other lenders have been clamping down on credit for months, a process that accelerated after the spring banking crisis shook the industry, as indicated The Wall Street Journal and the Post.

South Florida, with some of the highest costs of living in the US, is under the brakes of bank loans and a superb increase in interest rates by other credit companies.

The impact has been singular. While in cities of Miami-Dade, Broward and Palm Beach office rents and occupancy have increased, and new commercial projects are even being built; Unemployment rates have never been seen before in Washington DC, Philadelphia, New York, Chicago, Portland, Seattle, San Francisco and Los Angeles (localities governed by the extreme left).

According to experts, small and medium-sized banks in the US are practically out of the core businessexcept for the best customers, as their cash deposit costs, which for a long time were almost zero, rose to 5%, forcing lenders to obtain interest rates on debt that start at 7% already They often reach double digits.

The closure of loan availability for small and medium-sized businesses is harming economic growth, profits, employment and consumption. Major US banks such as JP Morgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs Group and Morgan Stanley, among others (in the too-big-to-fail category), lend to their powerful clients, but are not major players for small and medium-sized businesses, despite their various plans.

Interview with expert

Among the financial and real estate investment experts in South Florida is Stephen Bittel, founder and president of Terranova Corporation, who agreed to an interview for DIARIO LAS AMÉRICAS.

-How will the measures on loans affect consumption and asset purchases?

Most banks have closed new commercial loan allocations for all but the best-in-class existing tie-ups. But even these obtain terms with lower benefits and higher interest rates than those supported by any negotiation.

-Are banks expected to tighten the requirements for granting loans much more in the coming months?

Citing statements from the Federal Reserve, it seems very likely that financial institutions will tighten lending standards by originating fewer and fewer new loans, and by pushing for repayment of existing debts.

-What percentage do you think the current policies of banks and lenders limit investment in South Florida?

Almost all new operations, whether acquisition or development, will be affected because more cash capital will be required and rising interest rates will put further pressure on investments. As long as the returns requested on purchase and sale operations exceed the rates at which banks are willing to lend, the markets will remain frozen and with little activity.

-How many loans (in approximate percentage) have banks rejected in the last 6 months or in 2022 in South Florida?

Banks are rejecting almost all new loans, or are offering conditions that few borrowers accept, leaving transactions paralyzed or null and void. Add to that the fact that insurance costs have doubled for new owners, and it’s almost impossible to close any deal.

-Does the new restrictive policy of financial entities denote the great fear about the current economic conditions in the US?

The reduction in the amount of loans is mainly due to the Fed using interest rates to lower inflation. Almost all developed countries in the world – and all of Europe – face the same problem. The Biden administration cannot be blamed for this, but it can be blamed on the long-term easy money policy of the last 12 years and the supply interruptions due to the COVID-19 pandemic along with the war in Ukraine.

-Do you believe that the US is in an economic recession from 2022 that the government does not want to recognize?

Consumer debt is at a record level and there is little room left to continue spending. Consumption has finally slowed down and we should see the impact in the coming months, as consumers are running out of money and other alternatives.

-What are some consequences of the credit slowdown in the real estate sector in South Florida?

Miami may be the best-performing real estate market in the world, a result of the massive migration of high-net-worth residents driving home sales and commercial leasing. Population growth tends to solve real estate problems, and the growth of the wealthy is a convenient solution for almost everyone.

-What is the average interest rate that banks now impose on loans?

Rates range from 7% for the best low-leverage borrowers to as high as 12% for non-bank private lenders, the average rate ranges between 8% and 10%, which is a quite complex in times of great uncertainty.

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