Credit Demand and Credit Supply

We all now seem to agree that credit in the United States is actually growing during this "credit crunch," albeit at a slower rate than a year ago.  Tyler and others argue that growing credit is actually a sign of the credit crunch.  A credit crunch may show up "counterintuitively as a spike in borrowing" as firms draw on lines of credit.  Contra Tyler this view is certainly "convenient" but I do agree with him that this view is not unfalsifiable.

To wit, let’s falsify it.  The last time we had talk of a big credit crunch in the United States was during the 1990-1991 recession.  Was credit growing during this time as firms drew on lines of credit?  No.  Most of the credit measures that today are growing were in 1990-1991 flat or shrinking.  You can look at the pictures here or look at Table 1 of Ben Bernanke and Cara Lown’s well known paper (Google preview, JSTOR here).  In 1990-1991, for example  business loan growth was zero while today it is well above 10% (the same thing was true in 2001).

Peculiarly, Tyler argues that lack of credit is a leading cause of the crisis but a lagging indicator!   As a result, he needs to resort to non-verified conjectures about credit options to support the credit crunch story.  I have a simpler story, credit is a lagging indicator because it’s credit demand not supply that is the problem.  My story also makes sense of the fact that credit usually lags on the upturn as well – a fact which option value has difficulty explaining.

One error that I believe Tyler is making is to assume that skepticism about the credit crunch implies that one must be downplaying the seriousness of current economic conditions.  Not true.  First, it’s quite possible to have a very serious recession with growing credit – we had this in 82, for example.  Second, if Tyler is correct that the credit crunch is the primary cause of our current conditions then bank recapitalization should restore the economy to good working order.  In contrast, I think the Paulson/Bernanke plan is in trouble because credit demand is shrinking faster than credit supply.

Addendum: In response to Tyler (below) and several people in the comments.  Interest rates are not unusually high, certainly nowhere near as high as you would expect given a "credit crunch."  In fact, interest rates on say 30 year mortgages are falling and are lower now than at the height of the boom and no higher than in 2002 near the beginning of the boom.  I suspect that real interest rates are even lower than nominal rates suggest – inflation expectations anyone?  I wish that more people would present their arguments with data and not with anecdotes.


Comments for this post are closed