Did Demand for Credit Really Fall?

Includes: AXP, BAC, C, DFS, MA, V
by: The Baseline Scenario

By James Kwak

One standard attack against banks is that they have not expanded lending sufficiently to help the economy recover. The standard defense has been that the supply of credit collapsed only in response to a collapse in the demand for credit. The primary measure of demand for credit that I know of is the one compiled by the Federal Reserve by surveying bank lending officers; it shows falling demand for all types of credit from 2006, with an acceleration in the fall in late 2008.

Presumably this is based on the number of people walking into bank branch offices (or calling up on the phone, or applying online, etc.). But Google (NASDAQ:GOOG) has another way of tracking demand for credit; the Google Credit & Lending Index measures the relative volume of searches* for certain terms like “credit card,” “loan,” and “credit report.” There’s some seasonality there, but in general the levels look higher in Q4 2008 and Q1 2009 than in Q4 2007 and Q1 2008.

There are a couple of plausible reasons for this discrepancy. One is that this is a silly index and should be ignored. The other is that people wanted credit just as much (or more) than before the crisis, as measured by Internet searches, but they couldn’t find it online (because fewer providers were advertising, or the terms offered weren’t as generous, etc.), so they didn’t bother going into the branch (or calling).

I’m not going to be able to resolve this here, but it comes down to which you think is a better source of information: bank officers judging based on their impressions of incoming activity, or people sitting at their keyboards searching for “credit cards.”

* Relative to all Google searches, so numbers might be affected by seasonal or other patterns elsewhere in the world; for example, as shopping-related searches go up in December, everything else might see a (small) corresponding decline.