Thursday, October 9, 2008
As we contemplate the financial destruction all around us, it's very important to keep in mind that this has nothing to do with a shortage of money or a cessation of bank lending. To begin with, the Fed has pumped in a massive amount of reserves to the banking system, as illustrated in the first chart, in the most aggressive response ever to a financial crisis. The second chart shows the level of M2, the best measure of the money supply I know. It has been growing steadily, and is up over 6% per year for the past two years. There is nothing strange or mysterious or deadly going on here. As my other posts have shown, bank lending to the nonfinancial sector continues growing in unabated fashion, and total bank loans are at a record high as of just a week ago, according to data released very recently.
This is a problem of confidence, which in turn has created a shortage of buyers. This doesn't need to be an intractable problem, and there is little risk, as I see it, of the economy shutting down because of a lack of money. It's probably very true these days that the only thing we have to fear is fear itself.
Posted by Scott Grannis at 6:18 PM