Bank lending still healthy

"Bank Lending Keeps Dropping" reads the headline of today's Wall Street Journal. "Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector." This chart is my answer to that. Total Bank Credit has declined 3.7% ($370 billion) from its peak of last October, but relative to long term trends, there is no problem with the amount of bank lending at all. If we have a problem, it is that politicians want to see "results" from their forced injection of TARP funds to major banks.

If bank lending really were in decline, we should see money supply measures also declining, but all measures of money are instead rising. As it is, the long-term growth rate of bank lending still far exceeds the roughly 6% long-term growth rate of both nominal GDP and the M2 money supply. And in any event, why should we expect bank lending to rise at a time when the economy is contracting and we know that deleveraging is the norm? You can't force banks to lend if there aren't willing borrowers.

As this chart suggests, any recent weakness in bank lending is likely a natural response to above-trend growth in bank lending in the runup to the currrent crisis, coupled with the weakness in the economy and the desire by many institutions to reduce their leverage.