Credit Crisis Gathering Speed

The credit crunch appears to be gathering momentum in the United States. Bank credit contracted 9.2% in the 13 weeks to June 18 and 7.9% in the 13 weeks to June 25 (hat tip to Northern Trust for data).

Declines of this magnitude in bank loans have never been seen before in the data (which goes back to the mid-1970s). By comparison, the worse recession of the post-war era — in the early 1980s — saw less than a 3.5% drop.  As if we didn’t have enough bad news already emanting from the U.S. financial sector, the latest being the loss of confidence in Fannie Mae and Freddie Mac.

When individuals and businesses don’t get loans, they pull in their horns and the economy wilts. Furthermore, credit contraction makes the banking system a poor conduit for stimulative monetary policy. If the recent decline in bank credit continues, could the much anticipated U.S. recession finally make an appearance? And could it be of the hard-landing variety?