Credit is Flowing, Sky Is Not Falling, Don't Panic
In democratic societies, every great surge of the government’s size, scope, and power rests on a foundation of fear and the present occasion is no exception. The president, the secretary of the treasury, congressional leaders, and the vultures now swarming Washington to pick the remaining flesh from the taxpayers’ bones would have us believe that unless the colossal rip-off now being formulated in Congress is enacted, the future will be too horrible to contemplate.
Journalists, as usual, are doing their part to create an atmosphere of fear. Reports characterize the bailouts as “a bid to unlock the flow of credit” and make reference to “the frozen credit markets.” It’s hyperbole, don’t believe it.
Although certain financial institutions are undeniably in deep trouble–difficulties of their own making, we might add–the problems in particular financial circles should be kept in perspective. Note especially that credit markets in general have NOT ceased to operate. Moreover, lenders are extending credit in historically great amounts. To see this reality, however, we must break away from anecdotes in the financial press, which is eager to attract readers, and from fear-mongering by the political class, which is eager to seize more power, and examine the data that describe wider market transactions. For this purpose, the St. Louis Fed’s Web site is a useful resource.
Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This loan volume is 15.5 percent greater than it was a year earlier, and 30.8 percent greater than it was two years earlier. Frozen credit?
Consumer loans at all commercial banks, which are reported monthly, have also grown rapidly. The most recent report, for August 2008, shows outstanding loans of $845 billion, an all-time high. This loan volume is 9.2 percent greater than it was a year earlier, and 16.5 percent greater than it was two years earlier. Frozen credit?
Even real estate loans at all commercial banks, which are reported monthly, grew rapidly until very recently. The most recent report, for August 2008, shows outstanding loans of $3,642 billion, only slightly below the all-time high (in May 2008). This loan volume is 4.1 percent greater than it was a year earlier, and 15.5 percent greater than it was two years earlier. Frozen credit?
Lest one suspect that I have cherry-picked my examples, consider finally the amount of all bank credit at all commercial banks, which is reported weekly. For the most recent week reported, the one that ended on September 9, this credit amounted to $9,406 billion, which is only slightly less than the all-time peak of $9,485 reached in the week that ended on March 26, 2008. For the past six months, total commercial bank credit has remained on a high plateau, well above the levels reached in previous years, when everybody seemed to think that credit was ample.
One might object that a leveling off, after a long period of steady, rapid growth does constitute a substantial change in credit-market conditions. True, enough. But we must also recognize that the rapid growth of credit during the years from 2001 to 2007 was scarcely a healthy development. In fact, this effusion of credit fueled the housing bubble and countless other malinvestments that now must be liquidated, because without a continuation of the very-easy-money regime, these projects cannot be brought to completion or, if already complete, operated without further loss.
That malinvestments must now be liquidated merely reflects the mistakes made in the past, induced by bad government policy at the Fed and other credit-related agencies, such as Fannie and Freddie. Of course, some of the necessary adjustments will be painful for the parties directly involved. But the huge bailout now being concocted in Congress will only compound the errors of the past by keeping some malinvestments on life support, deferring the day that lenders must write off bad debts, and preventing the entire financial system from returning to a semblance of economic viability without ongoing subsidies and bailouts that impoverish the taxpayers and threaten the entire economy.
For now, however, the important point to recognize is that the sky is not falling. Lenders continue to lend at high rates, and the economy continues to operate reasonably well. If people panic and allow Congress to exploit the hyped-up fears of the moment, however, much worse outcomes may be brought about, not the least of which is another giant leap in the size, scope, and power of the federal government–a direct threat to our economy and our liberties.
Laeeth Isharc - 10/8/2008
Hope you're well.
Spot on about opportunists using fear to expand the scope of intervention.
However I think you you may find that C&I loans distort the picture. A great deal of credit growth was driven by securitisation, which was off balance sheet.
Following the collapse of structured investment vehicles banks have been forced to take these assets back on to their balance sheet, which has artifically inflated C&I loans. Doug Noland of Prudent Bear is the best source on this.
The 2001-2007 regime was certainly not healthy, but the impact of collapsing credit growth is going to make it seem like the sky really is falling as the cluster of entrepreneurial errors becomes evident.
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