From Crunch to Catatonia

by: Felix Salmon

Bloomberg had a great headline this morning:

Banks' 'Catatonic Fear' Means Consumers Don't Get TARP Relief

While it does have a little bit of on-the-other-hand, the thrust of the story is strong and clear: We're trying to kick-start bank lending by throwing money at the financial system, and it's not working. And the names lined up to push this thesis are big ones, including Alan Blinder, who provided the "catatonic fear" quote which got promoted into the headline.

I love these Bloomberg stories: While remaining objective and true to Bloomberg's wire-service mission, they aren't afraid to be provocative and contentious as well. Would that the WSJ followed suit more often. In any case, do read the piece: It's a nice antidote to whatever piece you've just seen saying that there really isn't a credit crunch at all. Of course there is:

The Fed said consumer credit fell by $6.4 billion in August, the largest drop in 65 years, and then by $3.5 billion in October, the first time since 1992 that there were two months of declines in a year.

In its most recent quarterly Senior Loan Officer Opinion Survey in October, the Fed reported that about 85 percent of U.S. banks said they had tightened standards on commercial and industrial loans to companies with more than $50 million in annual sales, up from 60 percent in July. Ninety-five percent said they increased the cost of those loans. About 70 percent said they made it more difficult to obtain prime mortgages, and almost 65 percent said they did the same for consumer loans.

Yes, despite the falling interest rate environment, 95% of banks have increased the cost of their loans. Sounds like a credit crunch to me -- and sounds, too, like the stated aim of the government buying equity stakes in banks simply isn't working. As Neel Kashkari described it:

The goal of the Capital Purchase Program is to stabilize the financial system and restore confidence in financial institutions, which will increase the flow of credit.

Even if the first has happened (and that's debatable), the second two are clearly still a long way off.