Tuesday, February 24, 2009

Good news recap (8)

This is the first appearance of this chart, but it falls under the rubric of "no shortage of money" which has received plenty of attention here over the past several months. We keep hearing and reading that banks are very reluctant to lend money these days, and the economy is suffering as a result. Well, the reality is considerably different from the hype, as this chart demonstrates (data through the end of January '09). Bank lending to consumers has actually accelerated over the course of the past 12-18 months, and currently stands at a new all-time high.


Jeff said...


Wouldn't you agree that it's not the banks that have stopped lending (although they have certainly changed their lending standards and rates they are charging for loans), but rather, it's the secondary market that has dried up. This was a key market for a great number of the loans, etc. that people received. This is what has not come back to date.

Scott Grannis said...

I'm glad you brought that up. I wish I had a chart to illustrate this point. As you say, what has dried up is the secondary lending market, where loans were packaged and resold as securities, and many of those were in turn repackaged and sold.

I think of that activity as akin to the velocity of money. The banks create the basic money supply, then secondary markets slice and dice it and carry it to the nooks and crannies of the global economy.

Velocity has plunged as this secondary activity has ground to a halt. It's not that there is a sudden shortage of money it's that it is harder for people to get their hands on the money. It's not being spread around in such a fluid fashion as before. Money demand has surged, which means people are much more reluctant to part with their money.

This can all change, however, once confidence returns and once financial innovation makes a comeback. There is a big chunk of the fixed income market that is AWOL, and someone could make lots of money figuring out how to crank money velocity back up. Where's there is a big profit motive I tend to think that sooner or later we will see promising products appear.