The media and the political interventionists have insisted that a huge credit crunch is going on that “proves” the failure of financial capitalism and the free market in general.
What is a work is another political “fast one” to rationalize and justify the growth of the interventionist-welfare state.
The Federal Reserve’s own data shows this to be another big government lie. Throughout 2008 bank loans have been increasing compared to a year earlier, both in absolute dollar terms and as a percentage increase over a year ago.
In the early months of 2008, in fact, commercial and industrial loans were growing at more than 20 percent over a year earlier. And between July and November these types of loans were still expanding in the rate of 13 to 15 percent over a year before.
In addition, the Fed’s survey of bank lending practices found that in October (the last month for which the data is available), only 25 percent of loan officers said they had “tightened considerably” on extending such loans, while 28 percent said their practices had not changed at all. About 47 percent said they had “tightened somewhat.”
The facts and figures can be found in a new piece that I’ve written on, “The Financial Crisis and Business Loans: The ‘Credit Crunch’ That Isn’t.”
There is no financial “deflation,” there is no “collapse” of banking and borrowing.
What is at work is the creation of a new version of the “myth of the failure of capitalism” to serve as the justification for why the straightjacket of even more government controls and regulations must be extended over what remains of the market economy.
And it serves as the rationale for why government spending must grow in a big way — and fast — to “save capitalism” from itself.
Yes, it is beginning to be a “replay” of the 1930s: bigger government, huge budget deficits, and more monetary manipulation. Welcome to the world of the planned and managed economy redux.
Richard Ebeling
{ 7 comments }
Throughout 2008 bank loans have been increasing compared to a year earlier, both in absolute dollar terms and as a percentage increase over a year ago.
?
Could that have anything to do with credit being made easier by the Fed?
There is deflation. The Fed are just taking extraordinary measures to run ahead of the it.
The Fed had to do all that stuff because there is a credit collapse.
This article is like proving there is no leak in the boat because the water level is going down (because someone inside is frantically bailing the boat out).
nitpick -
http://www.wsu.edu/~brians/errors/straight.html
Regards, Don
Jay D,
Look at the Fed data. It shows that the decline in loans is very, very small (we’re now down to the same level as we were at in September… oh no!). Now, that may be the case because the Fed is pumping in liquidity like mad.
But, the timing is funny to me. The first big Fed injection was in the week of Sept. 10 (and shows in the Sept. 17 data). Now, it is true that in the 4 weeks leading up to that that credit had “crunched” by 0.5% (down to levels that had been seen two weeks prior). But, that hardly seems noteworthy. And it certainly doesn’t seem to justify more than doubling the quantity of reserves… which is what the Fed did.
People, especially the media, needs to realize that the current Federal Reserve system and its powers are basically an oxymoron to free market capitalism. With it we do not have free market capitalism and hence, capitalism cannot be blamed for this mess.
“The Fed had to do all that stuff because there is a credit collapse.”
It “had” to do NOTHING. The only thing the Fed “has” to do is dismantle itself. That is all.
The C&I data listed on bank Call Reports is only part of the funding going on. First, good loans pay down while bad loans do not. Many large banks are stuck with bad loans that are illiquid preventing banks from relending the money elsewhere. Most developers are borrowing money from their “interest reserves” to keep their loans current. Second, the commercial paper market blew up with the massive run on money market accounts. Third, international trade has substantially declined because banks are not writing letters of credit. Four, mortgage and other consumer debt has dried up with the blow up in the securitization market. Five, bond underwriting, particularly for munis, has disappeared. Six, companies cannot be adequately recapitalized because their stock price is too low. Seven, internally generated cash flow of businesses has disappeared due to the decline of revenues. Eight, the Yen carry trade has disappeared due to the rise in the value of the yen. I apologize if I missed a couple of other credit crunch factors.
From Captain Dan:
“Many large banks are stuck with bad loans that are illiquid preventing banks from relending the money elsewhere. Most developers are borrowing money from their “interest reserves” to keep their loans current. Second, the commercial paper market blew up with the massive run on money market accounts. Third, international trade has substantially declined because banks are not writing letters of credit. Four, mortgage and other consumer debt has dried up with the blow up in the securitization market. Five, bond underwriting, particularly for munis, has disappeared. Six, companies cannot be adequately recapitalized because their stock price is too low. Seven, internally generated cash flow of businesses has disappeared due to the decline of revenues. Eight, the Yen carry trade has disappeared due to the rise in the value of the yen. I apologize if I missed a couple of other credit crunch factors.”
Nice work. Though, I do question how #’s 3, 6, 7, and 8 qualify as constituting a contraction of credit. Surely, yes, they result indirectly. But, no, they don’t constitute a credit contraction.
However, your criticism of the “credit crunch” definition used in this blog apparently (?) still stands.
One excellent Austrian perspective on this is here:
http://blog.mises.org/archives/006967.asp
Comments on this entry are closed.