Credit as an option
I think of credit as not just a current period flow but also as an option; this is implicit in many of Fischer Black’s pieces, including "Banking and Interest Rates in a World Without Money." If you lose the option to borrow that is a credit crunch too. As for the current financial crisis, my view of the data is that many borrowers have been drawing on their pre-existing lines of credit like crazy, for fear that their chances to borrow may be drying up. Banks have felt liquidity squeezed, in part because of pending CDS settlements, in part because so many borrowers are exercising their borrowing options, and in part because of potential insolvency. That liquidity scramble is why we have been seeing such a huge TED spread and near-zero nominal rates on T-Bills. Even now it remains unclear whether these options will be replenished and of course if they are not that means trouble.
The collapse of "borrowing as an option" shows up in market prices and it also shows up in many anecdotes, as chronicled at calculatedrisk.blogspot.com. It does not necessarily show up in current period credit flow data and in fact it may show up counterintuitively as a spike in borrowing.
I am puzzled by Alex’s admission that there is a recession; no matter which way you assign the causality, doesn’t that mean credit should be contracting? Working within the confines of his own view, shouldn’t Alex be worried that credit flows remain so high?
I believe if we had an explicit series measuring the borrowing option. and its recent collapse, it would show the credit crisis very clearly. In the meantime that crisis does show up in other pieces of information.
Addendum: Here is comment from Mark Thoma and also Felix Salmon.