Wall Street is having a giddy summer.

Inflation is falling, the economy is strong, and the stock market rallied 20% in the first half. The market is in such high spirits it even shrugged off Fitch’s surprise downgrade of U.S. debt.

Not bankers.

According to data from the Fed’s latest senior loan officers survey, banks are holding their borrowers to the most stringent rules since the collapse of Lehman Brothers.

Chart on lending to consumers

Bloomberg’s senior editor, Ed Harrison, wrote, “I did a search for 'loose’ or 'loosening' to see if there were more favorable lending conditions anywhere. There weren’t. The terms never came up once in the survey. But the word “tight” appears 66 times.”

The Fed surveys 80 large domestic banks and 24 U.S. arms of foreign banks each quarter. They ask about changes to their lending policies for commercial, real estate, and consumer loans.

The report usually makes for a dull read; banks hardly ever make any material revisions to their lending criteria. But this quarter’s report was a bit of a doozy.

What bankers are trying to tell us

Other than a brief dip during the pandemic scare, consumer loans haven’t been this hard to get since the darkest days of the Great Recession.

That was when Lehman Brothers collapsed. Merrill Lynch and Bear Stearns were forced into shotgun marriages with Bank of America and JP Morgan Chase, respectively. Washington Mutual and Wachovia plunged off cliffs.

Meanwhile AIG, Detroit’s automakers, and the $14 trillion prime money fund market all teetered on the edge of extinction.

That could not happen today, bankers and bulls say. But as history shows, Wall Street is terrible at predicting recessions.

Bloomberg surveys Wall Street analysts about the probability of a recession in the next 12 months. In the latest survey, the predicted likelihood fell from 65% to 60%.

Stuart Allsopp, a respected contrarian investment analyst, recently pointed out that this level, “...is around where it was in early 2008 when we now know the economy was already in contraction.”

The loan and recession surveys are not the only skunks at Wall Street’s garden party.

A lot of economic indicators are in scary territory. Take the Conference Board’s index of leading indicators (LEI)

It combines three financial and seven non-financial components. And as the chart below shows, it has been effective at predicting recessions, except for the one caused by a non-economic factor, Covid:

index recession indicators

The Conference Board’s Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators did not mince words in the introduction to the June LEI report:

“The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the run-up to the Great Recession….Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the U.S. economy is likely to be in recession from Q3 2023 to Q1 2024."

Striking parallels with the Great Recession

Other parallels with the Great Financial Crisis are appearing.

The private equity market, where investors purchase companies by forcing them to take on boatloads of debt, looks ready to implode, as it did in 2008.

One big buyout baron recently described his business as “in retreat.”

Bulls who argue that the parallel with the Great Financial Crisis is flawed because residential real estate has not begun to deteriorate ignore the commercial side of the market.

Kastle Systems, an office security swipe-card provider with customers in 2,600 buildings, aggregates the data from these clients to determine how many people have returned to work.

Its most recent report, from July 31, showed that office buildings are still half empty.

Corporate tenants are not renewing leases, creating a glut of empty offices in major cities. According to recent estimates, the value of office buildings in New York City has fallen by $76 billion from their last sales prices.

Companies that own these buildings cannot service their loans or refinance them when they come due because of the Fed’s rate hikes.

Mid-sized banks like those that went bust in March’s mini crisis are the principal lenders and will suffer the way real estate lenders did during the S&L Crisis in the 1980s and during the Great Financial Crisis.

What’s the average person to do?

Like the loan officers who responded to the Fed survey, the answer is: manage risk. As those who watched their life savings evaporate in 2008 learned the hard way—in a crisis, cash is king.