Credit demand and credit supply, response
I don’t agree with much of Alex’s take. Is he suggesting that the crisis started because *borrowers* lost their appetite for loans? If so, why in his view is the measured credit aggregate doing fine? In terms of what really happened, the core story is that the financial systems of many countries have been hit by solvency shocks, some credit markets (not all) have frozen up, we have zombie banks, asset prices tank, and now yes the demand for credit will be going down as well.
Does Alex deny the "solvency shock"? Or does he think you can have such a shock without some credit markets freezing up? His post does not tell us but I find either position extremely implausible.
By the way, LIBOR and many other interest rates are rising, not falling; that is not what you would expect if falling credit demand were the key problem. Nor does Alex mention the "shadow banking system," a core part of the current disintermediation. There is no way to explain away what is happening there and of course that is not counted in the aggregates Alex consults. There also has been a massive liquidity scramble in some sectors which again is inconsistent with falling credit demand as the problem.
The current punishment of the banking system goes far beyond the early 1990s; today’s credit crisis is driven by insolvency and potential insolvency but the 90s did not devastate finance or anything like that. And I’m not especially sanguine about bank recapitalization, as I’ve indicated in numerous posts to date. For one thing, politicization has its own costs but more importantly there is no guarantee that recapitalized banks will lend on the appropriate scale.
I can at least say with confidence that either Alex or I is totally wrong on this matter.