Friday, October 3, 2008

More thoughts on the "credit freeze"

As I noted yesterday, the "credit freeze" that has everyone in a panic is not a credit squeeze. Financial institutions are terrified of lending to their brethren, but are lending freely to everyone else. Financial commercial paper has fallen 28% in the past year while nonfinancial commercial paper continues in a rising trend that began over four years ago, and total bank lending is at an all-time high.

One thing is clear from all this: the financial sector is shrinking rapidly. That's the logical result of the collapse of subprime lending and that in turn means no more creative securitization of all the flaky loans that were being made in the past. That helps explain why asset-backed commercial paper has plunged 40%. Banks are shrinking, collapsing, merging, and deleveraging. And becoming healthier in the process. Isn't that exactly what should be happening? The economy is in the midst of a gigantic restructuring: resources are shifting away from housing and housing-finance-related activities and into new areas. That is a very healthy development. Right now, though it's hard to identify exactly, there are parts of the economy that are growing and laying the foundation for future growth, even as the banking sector painfully contracts.


Tin said...

"Financial institutions are ...lending freely to everyone else. "

What makes you say that has continued through the September crisis? Anecdote: McDonalds was going to roll out cafe bars nationwide, funded by BofA. BofA just backed out saying "we have found better use for our capital"

Scott Grannis said...

I say that because total bank loans are expanding and at all-time highs. Sure, some borrowers are being rejected, but on balance there doesn't appear to be a problem.