Astonishingly I am reading What Credit Crunch? by Robert Higgs on The Beacon.
For months, the news media have been dispensing reports of a “credit crunch.”
If credit were being crunched, one supposes that lenders would be willing to pay higher rates for funds placed at their disposal. Yet six-month certificates of deposit are now yielding less than the rate of inflation—people are paying the banks to take their money! Some credit crunch.
Perhaps someone can enlighten me. I simply don’t understand how we can have a “credit crunch” without substantial increases in real interest rates across the board.
It would help to have an idea of what a credit crunch was and for that matter what inflation is.
Let's start with the latter. Those who do not know what inflation is are advised to read Inflation: What the heck is it? The short version is inflation is a net expansion of money supply and credit while deflation is the opposite.
Now let's tackle the alleged non-existent Credit Crunch.
I find it amazing that anyone cannot sees there is an ongoing credit crunch when Bernanke resorts to an alphabet soup of lending facilities [FAF, PDCF, TSLF] to stimulate lending.
If that was not enough in and of itself, what about Henry Paulson saying Fannie Mae (FNM) and Freddie Mac (FRE) are "essential" because they represent the only "functioning" part of the home loan market. For more on this idea please see You Know The Banking System Is Unsound When.... Is it possible to not be in a credit crunch when the mortgage market is not functioning?
Furthermore, mortgage lending standards are tightening, credit card lending standard are tightening, and in fact Bank Credit Is Contracting. How often does that happen?
Worried Banks Sharply Reduce Business Loans
The New York Times is reporting Worried Banks Sharply Reduce Business Loans.
Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.
The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.
When Mr. Greenblatt called the local branch of Wachovia — the same bank that had been aggressively marketing loans to him for years — he was distressed by the response.
"The exact words were, ‘We’re saying no to almost everybody,’ " Mr. Greenblatt recalled.
We’re Saying No To Almost Everybody
The above sentence is the very epitome of a credit crunch. Banks do not want to lend to all but the most credit worthy borrowers. However, the most credit worthy borrowers have no need to expand in this environment.
Let's look at another snip from "What Credit Crunch?"
If credit were being crunched, one supposes that lenders would be willing to pay higher rates for funds placed at their disposal. Yet six-month certificates of deposit are now yielding less than the rate of inflation—people are paying the banks to take their money! Some credit crunch: banks and thrift institutions don't even have to pay a positive real rate of interest to attract funds! This situation makes sense only if the world is awash in loanable funds, so much so that people are clamoring to part with their money for less than zero reward.
Perhaps someone can enlighten me. I simply don't understand how we can have a "credit crunch" without substantial increases in real interest rates across the board.
Well lenders are paying above market rates for money. Many banks, especially the unsound ones, are offering 250 basis points or more above treasury rates. On a percentage basis that is an enormous spread.
Furthermore, in a credit crunch, junk yields should rise and they are. In a credit crunch lending standards will tighten and they are. In a credit crunch lenders will "Say No To Almost Everyone" and they are.
Finally, it makes perfect sense for money to be parked in money market funds below the alleged rate of "inflation". I have talked about this on many occasions. The reason M3 has been rising is that corporations have been tapping credit lines, not for expansion, but in case those lines are shut off. Those corporations have been parking that money in institutional money market accounts.
This is not "inflationary" in any way shape or form. Deflation is here and upon us, and some cannot even see there is a credit crunch. It's rather amazing.