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For months, now, the news has been filled with reports of a huge credit crunch crushing the ability to borrow in the United States economy. The impression of a financial sector that has ground to a halt, however, is not born out by the facts. To the contrary, lending and borrowing have continued to grow in America, albeit at a lower rate of growth all through 2008.
Banks have used a large portion of the Federal Reserve’s expansion of the monetary base (up 70 percent since July) to shore up balance sheets. But they have not “rebalanced” their balance sheets through any noticeable decrease in commercial and industrial lending. As Graph 1, below, shows commercial and industrial loans have grown from around $1 trillion in the middle of 2005 to $1.6 trillion near the end of 2008, or a 60 percent increase over this period. Even over the last year (November 2007 – November 2008) such loans increased by 11.3 percent. And they continued to increase, as well, since July of this year by 6.7 percent, in spite of the growing financial fears. 
Source: Board of Governors of the Federal Reserve System Commercial and industrial loans were exploding well into early 2008. As the Graph 2, below, makes clear these types of loans were growing as monthly rates of over 20 percent from a year earlier. But even as the “credit crunch” supposedly set in, at the end of the summer, commercial and industrial lending has continued to increase at monthly rates still around 13 to 15 percent from a year earlier. A part of the difference between the rate at which loans were being made early in 2008 and at the end of the year is the fact that financial institutions have reduced the number of new loans for which they are extended credit as they rebalance their own books. What is being provided are loans agreed to under prior commitments. And indeed, over 80 percent of loans being made are under this heading, according to Federal Reserve data. According to the Federal Reserve's "Loan Officers Survey on Bank Lending Practices," in October (for which the most recent information is available) less than 25 percent reported "tightening considerably" on new commercial and industrial loans, while 47 percent said they "tightened somewhat," and over 28 percent said they had kept their lending practices "basically unchanged." 
Source: Board of Governors of the Federal Reserve System The credit crunch, therefore, has not involved a “deflationary” decline in the amount of loans extended for commercial and industrial purposes, in comparison to the recession at the beginning of this decade. At that time, between 2000 and 2004, the dollar amounts of such loans and the percentage declines from a year earlier were in actual negative ranges. The current credit “crisis” has really taken the form of a decrease in the rate of increase of business lending, as banks have clearly raised their standards for “credit worthiness” and sound business practices. Business loans for viable commercial and industrial enterprises have remained available. All financial institutions have done, so far, as they get their own balance sheet house in order, has been to lift their lending foot off the borrowing accelerator to slow down what had been an unsustainable investment boom.
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"In particular, many traditional funding sources for financial institutions and markets have dried up, and banks and other lenders have found their ability to securitize mortgages, auto loans, credit card receivables, student loans, and other forms of credit greatly curtailed."
"Today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, even when liquidity is ample. Moreover, providing liquidity to financial institutions does not address directly instability or declining credit availability in critical nonbank markets, such as the commercial paper market or the market for asset-backed securities, both of which normally play major roles in the extension of credit in the United States."
"... the commercial paper market. As I mentioned, the functioning of that market deteriorated significantly in September, with borrowers finding financing difficult to obtain, and then only at high rates and very short (usually overnight) maturities."
"our forthcoming asset-backed securities program ... should also help to revive private lending."
http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm
Even he, and not just the media, makes it look like there is a credit crunch. Who is right? It's difficult for us peons to analyze the figures.
"The late Bob Weintraub, who served on the staff of the House Banking Committee and wrote extensively about economics and the Fed, told a colleague once that "the Fed can bail out anything in return for any collateral." The importance of this obvious statement is overshadowed by a larger truth. When federal agencies want to do something, such as bail out a client, they will do it regardless of their legal authority. When they don't want to do something, such as regulate banks, they will refuse to do it - even in the face of a legal mandate from Congress.
Senator Carter Glass, who devised the Federal Reserve System but fought federal control of the central bank, prophesied that the Fed might one day become "the handmaiden of the Treasury" when a profligate government sought a bailout. Little did Senator Glass ever dream that the bailout would occur under a nominally Republican government and that the Fed and Treasury already would be controlled by GS and other Wall Street firms!
But hope remains if we return to first principles. Transparency and accountability lead to credibility, the short version of why bankruptcy is better than bailouts. That may be the chief lesson of the past year. Hopefully our new President and his government will take the lesson as well.
http://www.contrarianprofits.com/articles/the-breakdown-of-the-world-money-machine/10682
[This article by Professor Ebeling] is similar to the argument of Minneapolis Fed researchers in October:
Facts and Myths about the Financial Crisis of 2008
www.minneapolisfed.org/research/WP/WP666.pdf
And here was the response from some Boston Fed researchers:
Looking Behind the Aggregates: A reply to "Facts and Myths about the Financial Crisis of 2008"*
www.bos.frb.org/bankinfo/qau/wp/2008/qau0805.pdf
The 2nd paper is probably correct - there is a credit crunch.
Professor Ebeling would you discuss the arguments in the Boston Fed paper in a part II to this article?
Thank you,
Charlie Perkins
Chino Valley, AZ
I think it also important to show the data from Oct 08-Dec 08. If you have it please show provide it. Also, what about the data for personal loans. Are you showing similar data? Please provide.
I guess I'm a skeptic but when certain data are presented and others are not, it makes be suspect. Why am I a skeptic? The apparent lack of integrity in our financial system gives me great cause to worry.