Floyd Norris has a good article in the NYT today. He pretty much dispels the myth that corporate credit markets have returned to normal, suggesting instead that they are functioning mostly on the basis of government guarantees.

One paragraph caught my eye:

It could be seen as a disappointment that the $500 billion in government-guaranteed loans issued around the world in the last half year have not done more to spur bank lending. But the syndicated loan markets continue to suffer because whole classes of buyers have vanished. Such loans were previously packaged into collateralized loan obligations, or C.L.O.’s, which were then sold as securities that could be rated as high quality even though the underlying loans were not. That business has blown up, and, increasingly, banks are making only those loans that they, or other banks, are willing to keep on their own balance sheets.

I guess there are a couple ways of interpreting this. You could say that a lot of very foolish people got religion and aren’t inclined to buy junk ever again or you could say that investors are so spooked that they won’t touch anything that isn’t gold plated. I think the latter is probably more correct and that may spell trouble.

Consider another article in the Times today about venture capital investments.

Venture capital investment in the first quarter dropped to lows not seen since before the dot-com bubble, according to an analysis of Thomson Reuters data.

Venture capital firms invested only $3 billion in 549 young companies in the first quarter, the lowest investment level since 1997, according to the analysis, done by the National Venture Capital Association and PricewaterhouseCoopers.

The amount invested was down 47 percent from the fourth quarter of 2008 and 61 percent from the first quarter last year.

Taken together, the decline in venture capital investment and the risk aversion in the credit markets beg the question as to how entrepreneurial activity is going to be financed at least in the near term. There’s no point in rehashing the importance of this from economic growth and job creation viewpoints, you now the arguments. It’s all well and good for GE, JPMorgan Chase or, say Boeing to return to profitability, we need that, but they aren’t the types of companies that are going to drive the economy dynamically forward.

Hopefully animal spirits return quickly. Government guarantees can be addictive. Once hooked investors find it hard to kick the habit and the political class is not shy about extending their reach.