Thursday, November 6, 2008
Inspired by a post by Mark Perry, I put together this chart using the latest data from the Federal Reserve. As I have noted several times before, the popular notion that the economy is at great risk because bank lending has stopped dead in its tracks is completely erroneous. Lending by all commercial banks now stands at an all-time high, and is up 9.2% in the past 12 months. I've drawn a trend line on the chart which is instructive. Over the past 36 years, bank credit has increased by a compound annual rate of 8.4% per year, only slightly faster than the 7% per annum increase in nominal GDP.
I don't see how this adds up to the assertion, as many claim, that a massive credit expansion is the root cause of our current crisis. Our current problems have nothing to do with a shortage of money or too much credit; rather, it is all about a shortage of buyers and a lack of confidence. And that in turn is being driven by the fear of defaults triggered by falling housing prices. Once prices stop falling and/or the market prices in the full extent of the likely losses, the crisis can begin to wind down. I think we're already in the early stages of that process.
Posted by Scott Grannis at 10:40 AM