Signs That the Credit Crunch May Be Over

Monitoring the money supply can be a useful tool in understanding "the big picture" of what is going on in the economy -- particularly now, when the economy has been plagued by a "credit crunch," or a relative scarcity of money. Let's take a look at some key economic indicators to see if that's still the case.

Towards the end of the summer/early fall of 2008, we saw money supply indicators, like MZM, contract. This was the result of deleveraging; in our debt-based economy, in which all money originates out of debt, paying off debts reduces the money supply -- while the issuance of debts increases money supply. Thus, the combination of deleveraging (paying off debts) with a decrease in bank loans resulted in the money supply contracting, the dollar strengthening, and asset prices falling -- all characteristics of deflation.

These trends seem to be reversing. The chart below tracks MZM; note the recent spike upwards.

Likewise, the TED spread -- an indication of fear and risk in the market, and whether or not banks are lending -- has been declining. A lower TED spread means less fear and more lending. The increase in money supply makes sense with a lower TED spread. Both run contrary to reports from much of the media that banks are still unwilling to lend.

The chart below illustrates the TED spread; note it has declined significantly from its peak in October, when the psychology of fear was at its peak.

In terms of financial markets, we've seen the dollar weaken of late, while gold has been rising. This is consistent with the behavior of MZM and the TED spread.

Disclosure: Long gold.

Comments

[sunil94062:]

BUT imperically - I can vouch for the correctness of the media news - that Banks - and many of them are NOT lending - at least not for Real Estate! We have been trying to get loans since October ($3MM to $50MM for various projects - rental apartments, senior housing, serviced apartments) - and all we hear are an unambiguous NO! No money to lend for Real Estate - No money to lend for working capital - No money to lend for credit lines - secured or unsecured, No bridge finance, pretty much NO lending. This includes Banks of every ilk - Majors to Community Banks and thrifts - nationwide from our sampling.

As further proof, I have heard of professionals (Doctors and Lawyers), who have had the APR on their credit card outstanding balances ($1,600 balances) jacked up into stratosphere (from 10% to 21%) and credit limits cut drastically (-90%). NO - credit is surely 'crunched'.

When asked, the decision makers at these Banks respond - All of the TARP money is being "held" as a cushion to offset portfolio losses not yet booked - and there are many more to be realized in times to come!

Maybe what we have here is that there three kinds of lies - lies, damn lies and statistics - and statistics are the worst kind!

I think Treasury goofed!

That is how I see it.

2008 Dec 29 09:03 AM

[Rob Viglione:]

Let's also keep in mind that "normal" TED spread is between 20-50bp. What we have now is still multiples of that.

Still, markets appear to be quieting...it's either complacency before further collapse, or perhaps the collapse has run out of steam. I'm buying long VIX to hedge equity positions.

2008 Dec 29 09:46 AM

[sickofthehype:]

No accountability for bailout funds has led to the hoarding nature of banks right now. Superior credit risk borrowers are being declined, and it doesn't make sense.

F the banks.

2008 Dec 29 09:47 AM

[petetoth:]

"Credit Crunch" was such a sweet name given to a financial (now economic) disaster of catastrophic proportion. Like a candy bar...

New versions should be coming out in 2009 "Credit Crunch with unemployment raisins," "Credit Crunch with bankruptcy nuts," and in late '09 "Credit Crunch with hyper-inflation bits o' crisps."

Only problem? Who will be able to afford it?

2008 Dec 29 09:53 AM

[cash:]

Just goes to show how flawed this TARP exercise has been. All it is serving is to mop up their free flowing red ink. No economic benefit whatsoever for our tax dollars. These banks should have long been allowed to go bankrupt. New small, nimble banks would have taken their place. A tiny fraction of this money given to enterprising entreprenuers would have helped create wealth for the future. But who gives a damn for constructive solutions these days?

2008 Dec 29 10:01 AM

[ain't no fo...:]

I'm being told by a good friend who I had once worked for and who has a successful financial consulting business catering to the small community banks (under $2 Billion in assets) and credit unions in southern New England that not only do these institutions have plenty of money to lend, but that they are in fact lending it quite happily.

The majors? Yes, that's a different story... but then again they were the ones that applied such leverage as to create their own problems... so perhaps they are getting just what they deserve, while the smaller, more prudent and more adaptable institutions are developing relationships with businesses and consumers that will last long after this crisis ends.

This is the first time that Wall Street and the major financial institutions have gotten burned badly in a recession... usually it is the middle and lower classes exclusively that are badly damaged while the big financial institutions go merrily on their way laughing at the sheep. No wonder that the Street and CNBC and all the shills and hucksters and "pundits" scream in such pain and fear now that the disaster has come home to roost... welcome to the world guys - ye reap what ye sow, and ye are getting your just desserts... hopefully (but doubtfully) you will learn a little humility and empathy for the rest of the world.

Meanwhile, some seeds are being sown for the recovery, and it is starting with the smaller, more adaptable businesses. Maybe capitalism isn't dead after all.


On Dec 29 09:03 AM sunil94062 wrote:

> BUT imperically - I can vouch for the correctness of the media news
> - that Banks - and many of them are NOT lending - at least not for
> Real Estate! We have been trying to get loans since October ($3MM
> to $50MM for various projects - rental apartments, senior housing,
> serviced apartments) - and all we hear are an unambiguous NO! No
> money to lend for Real Estate - No money to lend for working capital
> - No money to lend for credit lines - secured or unsecured, No bridge
> finance, pretty much NO lending. This includes Banks of every ilk
> - Majors to Community Banks and thrifts - nationwide from our sampling.
>
>
> As further proof, I have heard of professionals (Doctors and Lawyers),
> who have had the APR on their credit card outstanding balances ($1,600
> balances) jacked up into stratosphere (from 10% to 21%) and credit
> limits cut drastically (-90%). NO - credit is surely 'crunched'.
>
>
> When asked, the decision makers at these Banks respond - All of the
> TARP money is being "held" as a cushion to offset portfolio losses
> not yet booked - and there are many more to be realized in times
> to come!
>
> Maybe what we have here is that there three kinds of lies - lies,
> damn lies and statistics - and statistics are the worst kind!

>
>
> I think Treasury goofed!
>
> That is how I see it.

2008 Dec 29 10:28 AM

[Big K:]

The TED spread has been declining, however has flattened out at about 1.5, stubbornly not moving. This level of the spread still indicates a crisis environment and in effect is no better than where it was in October. Credit is still frozen, and not flowing like it should. The Treasury department needs to grab the money back from the Wall-Street banks, let them fall, and repay the tax payers. The politicians now have all of us invested in this Ponzi scheme of credit derivatives and swaps that are nothing but gambling losses. Executives in those banks should be disengorged of their ill gotten booty, and put on the street. There's no reason for the huge compensation those fools got while they drove their banks into the ground while fleecing the investors. Once the tax payer gets his money back, the economy will start to function like normal.

2008 Dec 29 04:59 PM

[wise:]

TED spread 1.4 today

2008 Dec 29 07:42 PM