Astonishingly I am reading What Credit Crunch? by Robert Higgs on The Beacon.
For months, the news media have been dispensing reports of a “credit crunch.”
If
credit were being crunched, one supposes that lenders would be willing
to pay higher rates for funds placed at their disposal. Yet six-month
certificates of deposit are now yielding less than the rate of
inflation—people are paying the banks to take their money! Some credit
crunch.
Perhaps someone can enlighten me. I simply don’t
understand how we can have a “credit crunch” without substantial
increases in real interest rates across the board. It would help to have an idea of what a credit crunch was and for that matter what inflation is.
Let's start with the latter. Those who do not know what inflation is are advised to read Inflation: What the heck is it? The short version is inflation is a net expansion of money supply and credit while deflation is the opposite.
Now let's tackle the alleged non-existent Credit Crunch.
I
find it amazing that anyone cannot sees there is an ongoing credit
crunch when Bernanke resorts to an alphabet soup of lending facilities
(FAF, PDCF, TSLF) to stimulate lending.
If that was not enough
in and of itself, what about Henry Paulson saying Fannie Mae and
Freddie Mac are "essential" because they represent the only
"functioning" part of the home loan market. For more on this idea
please see You Know The Banking System Is Unsound When....
Is it possible to not be in a credit crunch when the mortgage market is not functioning?
Furthermore, mortgage lending standards are tightening, credit card lending standard are tightening, and in fact Bank Credit Is Contracting. How often does that happen?
Worried Banks Sharply Reduce Business Loans
The New York Times is reporting Worried Banks Sharply Reduce Business Loans.
Two
vital forms of credit used by companies — commercial and industrial
loans from banks, and short-term “commercial paper” not backed by
collateral — collectively dropped almost 3 percent over the last year,
to $3.27 trillion from $3.36 trillion, according to Federal Reserve
data. That is the largest annual decline since the credit tightening
that began with the last recession, in 2001.
The scarcity of
credit has intensified the strains on the economy by withholding
capital from many companies, just as joblessness grows and consumers
pull back from spending in the face of high gas prices, plummeting home
values and mounting debt.
When Mr. Greenblatt called the local
branch of Wachovia — the same bank that had been aggressively marketing
loans to him for years — he was distressed by the response.
"The exact words were, ‘We’re saying no to almost everybody,’ " Mr. Greenblatt recalled. We’re Saying No To Almost Everybody
The
above sentence is the very epitome of a credit crunch. Banks do not
want to lend to all but the most credit worthy borrowers. However, the
most credit worthy borrowers have no need to expand in this environment.
Let's look at another snip from "What Credit Crunch?"
If
credit were being crunched, one supposes that lenders would be willing
to pay higher rates for funds placed at their disposal. Yet six-month
certificates of deposit are now yielding less than the rate of
inflation—people are paying the banks to take their money! Some credit
crunch: banks and thrift institutions don't even have to pay a positive
real rate of interest to attract funds! This situation makes sense only
if the world is awash in loanable funds, so much so that people are
clamoring to part with their money for less than zero reward.
Perhaps
someone can enlighten me. I simply don't understand how we can have a
"credit crunch" without substantial increases in real interest rates
across the board. Well lenders are paying above market
rates for money. Many banks, especially the unsound ones, are offering
250 basis points or more above treasury rates. On a percentage basis
that is an enormous spread.
Furthermore, in a credit crunch,
junk yields should rise and they are. In a credit crunch lending
standards will tighten and they are. In a credit crunch lenders will
"Say No To Almost Everyone" and they are.
Finally, it makes
perfect sense for money to be parked in money market funds below the
alleged rate of "inflation". I have talked about this on many
occasions. The reason M3 has been rising is that corporations have been
tapping credit lines, not for expansion, but in case those lines are
shut off. Those corporations have been parking that money in
institutional money market accounts.
This is not "inflationary"
in any way shape or form. Deflation is here and upon us, and some
cannot even see there is a credit crunch. It's rather amazing. Originally posted at: http://globaleconomicanalysis.blogspot.com/
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