Lenders Have Not Stopped Lending
People continue to assert that “nobody wants to lend” or that “credit has dried up,” but the data fly in the face of such claims. A great deal of lending is taking place. The interest-rate data I reported in a previous post derive from this lending.
For example, commercial and industrial loans at all commercial banks were $1,503.6 billion as of June 1, 2008. This loan volume is almost 19 percent greater than it had been a year earlier, 34 percent greater than two years earlier, and 53 percent greater than three years earlier.
Or consider real estate loans at all commercial banks, which were $3,644.9 billion as of June 1, 2008. This loan volume is 5.5 percent greater than it had been a year earlier, 17 percent greater than two years ago, and 33 percent greater than three years ago.
Or consider total consumer credit outstanding , which was $2,586.3 billion as of June 30, 2008. This loan volume is 5.6 percent greater than it had been a year earlier, 10.9 percent greater than two years earlier, and 15.2 percent greater than three years earlier.
Moreover, as elementary economic theory shows us, a fall in the real interest rate (for some securities, as I’ve reported, to approximately zero), at the same time that the volume of funds being lent has increased, can result only from an increase in the supply schedule of loanable funds relative to the demand schedule.
So, I repeat: the economy is awash in loanable funds, and the unprecedented volume of such funds now being supplied appears to be the obvious explanation for why real interest rates are so low in so many financial markets. To be sure, the least qualified would-be borrowers are not being served as readily as they were two to five years ago. Good. People who present nothing more than a warm body with a pulse should not be viewed as well qualified to receive unsecured loans; nor should they be given loans premised on the foolish expectation that all real estate will appreciate forever.
As for those funky derivatives, the institutions and individuals who invested in them ought to have learned a valuable lesson: do not trust some guy with a Ph.D. from MIT to tell you what a security is worth; insist on seeing actual market values. If no such values exist, don’t be a fool by investing in something you don’t understand and can’t rely on. I agree that all these crappy securities still sitting on certain firms’ balance sheets (or lurking off to the side) pose a big problem for those firms. Fortunately for them, and unfortunately for us poor taxpaying peons, many of these firms have friends in high places at the Fed and the Treasury. The bailouts have already begun, and more of them are almost certain to follow