Tuesday, February 5, 2008

No credit crunch! Credit boom is real! (amv)

Given the turmoil on the global financial markets the possibility of a credit crunch looms large, at least for many professionals, journalists and economists (e.g. Krugman). Yet, the recent Federal Reserve banking data suggest that the opposite is true: commercial lending is at an all-time high based on volume and the growth rate of commercial credit (year-to-year) is in double-digits for the last six month and close to 20% in the last four month. Credit growth is thus "stronger than ever before" (Mary J. Perry)! While the high level of credit is a result of past inflationary policies, it is no threat to economic performance per se. The economy ballooned nominally, but these distortions are bygones. The problem is the actual pace of credit growth, which indicates distortions in capital formations, which imply future liquidations and general disinvestments. Strong credit growth serves as proof of the expansionary stance of monetary policy in the United States, that is, as a proof of the interest rates being below the equilibrium level (that which equals the funds offered by voluntary saving and replacement allowances - i.e. amortization capital - with gross investment). The Fed simply delays the bust making is just worse.