Tuesday, January 06, 2009

The Credit Crunch That Isn't

The media and the political interventionists have insisted that a huge credit crunch is going on that "proves" the failure of financial capitalism and the free market in general. What is a work is another political "fast one" to rationalize and justify the growth of the interventionist-welfare state.

The Federal Reserve's own data shows this to be another big government lie. Throughout 2008 bank loans have been increasing compared to a year earlier, both in absolute dollar terms and as a percentage increase over a year ago (see chart above, data here).

In addition, the Fed's survey of bank lending practices found that in October (the last month for which the data is available), only 25% of loan officers said they had "tightened considerably" on extending such loans, while 28% said their practices had not changed at all. About 47% said they had "tightened somewhat."


What is at work is the creation of a new version of the "myth of the failure of capitalism" to serve as the justification for why the straightjacket of even more government controls and regulations must be extended over what remains of the market economy.

~Richard Ebeling

MP: The chart above shows the volume of business loans, real estate loans and consumer loan volume, based on an index that is equal to 100 in January of 2004 for each series (data here).

13 Comments:

At 1/06/2009 11:00 AM, Anonymous a Duoist said...

It would sure help if this graph included year-end, 2008.

 
At 1/06/2009 11:24 AM, Anonymous Anonymous said...

You are looking at the wrong side of bank's balance sheet.

On the asset side are the loans you are charting.

But you need to look at the liability side of the sheet, or how banks raise the capital to fund their loans. It consist of three basic items. One is deposits. Two is borrowing in the money market and other short term markets. The third is borrowing form the Fed. The crises is that the short term credit market shut down and the Fed stepped in and expanded loans to banks to offset the drop in short term credit.

So banks shifted from funding their loans from the short run market to the Fed. So the growth in bank credit does not show there was not a crises, rather it shows that the Fed did a very effective job of dealing with the crises.

This is exactly what a lender of last resort is designed to do.

 
At 1/06/2009 11:40 AM, Anonymous Anonymous said...

This is what I know.
In Commercial Real Estate it takes years before you break ground on a project. You can invest two years in order to figure out how much black mail the environmentalists will accept before dealing with the Unions and their black mail requirements. Both are mobsters but not as bad as Local and City Governments. Your Project will be held hostage to the City or County Government until they decide to move forward which can take another couple of years.
At the end of this process, the Banks have made loan commitments to the project. Now the Banks are not honoring the original loan commitments they made and are moving the goal line with mark to market type accounting vs. leases. The Banks are insisting on buy downs and new debt ratios which kills cash flow should the Developer have deep enough pockets to work in such an environment. Many just fold (BK).

Who are these Banks loaning money to?

The Company my wife works for has $60,000,000.00 Dollars worth of loan commitments to finish projects and the Banks are not funding no matter what the WSJ is writing.

Hotrod.
Sacramento CA

 
At 1/06/2009 12:33 PM, Blogger QT said...

Thanks, Anon. 11:24. Helps to put the issue in perspective.

Thanks also to Anon. 11:40. Am aware of the same forces hampering development in Ontario however, we have an additional one, the Ontario Heritage Act. Recent changes to the legislation have given appointed heritage architects and local LACACs (local area architectural conservancies) veto over any and all changes.

A heritage project our firm worked on had to be redesigned 4 times in order to satisfy the heritage architect's concerns which were largely aesthetic rather than historic/architectural. The result was increased consulting fees, and a two year delay which have effectively ensured that there is a loss on the investment. Essentially, the new rules create an incentive for demolition rather than preservation.

Am not surprised that developers are finding it difficult to obtain funding from banks. A pull back on residential given the market is understandable; as a sector, construction (commercial, industrial & residential) is often the canary in the coalmine. Capital investment in new plants/offices is where one usually sees a pullback first. Most companies want to be in a strong cash position going into a recession.

Is there anyone who can comment on other business sectors? Outside of the Big 3, have not really heard much about companies having their lines of credit cut although there was a great danger of this prior to the intervention of the Fed.

 
At 1/06/2009 1:48 PM, Anonymous Anonymous said...

QT,

How could anyone to anticipate this mess when Barney Frank told us all is swell only two months before Fannie and Freddie folded?

I guess I am the only one who thinks this mess was intended to crash a world economy 35 days before an election for political advantage in the favor of Big Government Socialists to dominate an election.

I do not ask the Government mandate Banks to honor prior loan commitments. I ask only for the Fed to stop any TARP money going to Banks who choose NOT to honor the loan commitments they had made. Let the courts sort the rest out.

Hotrod

 
At 1/06/2009 2:33 PM, Blogger bobble said...

hotrod:"I guess I am the only one who thinks this mess was intended to crash a world economy 35 days before an election for political advantage in the favor of Big Government Socialists to dominate an election."

bush and paulson went to congress, lied by telling them the economy was going to crash, to ensure obama would get elected?

 
At 1/06/2009 3:36 PM, Blogger 1 said...

hotrod says: "The Company my wife works for has $60,000,000.00 Dollars worth of loan commitments to finish projects and the Banks are not funding no matter what the WSJ is writing"...

Interesting and I'm wondering if that's just because of the conditions in California?

The reason I ask is that here in the St. Louis, Mo area (strictly anecdotal here) people I know who are in building commercial buildings don't seem to have a problem floating a loan...

Well isn't this unusual? bobble just dropped a real nugget of question...

bobble says: "bush and paulson went to congress, lied by telling them the economy was going to crash, to ensure obama would get elected?"...

Love the irony there...

The Administration's Unheeded Warnings About the Systemic Risk Posed by the GSEs

White House warns of GSE risks
Fannie, Freddie enjoy perception of backing, Mankiw says


Thank you (and you too Professor Mark) Richard Ebeling: "What is at work is the creation of a new version of the "myth of the failure of capitalism" to serve as the justification for why the straightjacket of even more government controls and regulations must be extended over what remains of the market economy"...

 
At 1/06/2009 7:24 PM, Anonymous Anonymous said...

Bobble,
The plan to kill the economy by Barney Frank, Chris Dodd and other Democrats for a political advantage was done to seat Hillary.
No one saw Obama coming. Who with two brain cells would think the American people would elect a rank Amateur as President? Most people who have ever had a job in the private sector are more qualified then Obama to be President.

Why not move ahead with the plan? They already killed Fannie and Freddie. Should they have waited to spill the beans until after the election?

Now Chicago Mobsters run the Country as you will see in the next 18 months when King Makers are exposed. One thing about Democrats in power. They get theirs or they eat their own.

Hotrod

 
At 1/06/2009 7:33 PM, Anonymous Anonymous said...

1,

Even Don Trump will tell you the Banks are not funding loans from TARP.

Maybe your guys are light years smarter then the rest of us. Maybe they had the dollars before the banking mess and will need funding to finnish their project? If that is the case I wish them luck.

Hotrod

 
At 1/06/2009 11:26 PM, Anonymous Bill Conerly said...

Mark, I'm afraid it's not as simple as looking at loan volumes. Commercial paper issuers paid for standby letters of credit. For a small fee, banks agreed to lend money if the borrower could not access the CP market. Other corporations paid loan commitment fees for money they didn't intend to borrow, just to have some extra flexibility.

When financial markets went haywire, the companies called their banks and enforced their contractual rights to borrow. That does not mean that banks are willing to enter into new transactions at this time; just that they don't have much choice.

Front-line bank examiners are telling banks to conserve liquidity and capital--which means, don't lend. Even though the regulatory leadership is urging banks to lend, the guy who actually visits the bank is saying just the opposite. I'm very worried about this.

 
At 1/07/2009 11:12 AM, Blogger Shannon Henley said...

What we have been doing isn't working very well,regardless of numbers,charts,compiled information
& statistics,etc...
To resist change when it's needed is a deliberate attempt to avoid or
disguise the real issue.
The Few & The Many; What is going to happen when there is nobody that
qualifies to obtain credit from a
system that has sold itself down the proverbial River of Inflationary Greed,plundering riches the entire trip,and come to rest in Over-Sold Bay?
S.L.Henley

 
At 1/07/2009 4:57 PM, Blogger 1 said...

"Even Don Trump will tell you the Banks are not funding loans from TARP."...

Well hotrod, I never said 'anything' at all about using banks that were leeching off the TARP slush fund...

"Maybe they had the dollars before the banking mess and will need funding to finnish their project?"...

These people work on the 35/25 plan with local banks and have for years...

I don't know what it costs to build the building and buy the equipment for a, 'metals treatment' plant now a days but I was told its quite substantial...

 
At 1/11/2009 1:42 AM, Blogger bobble said...

"The plan to kill the economy by Barney Frank, Chris Dodd and other Democrats for a political advantage was done to seat Hillary."

sorry, they aren't that smart. it's all they can handle to stuff the bribes into their pockets so it doesn't show as they walk down the street.

face the ugly facts. the economy failed due to over leveraging by commercial banks and investment banks on poorly written mortgages and over-borrowing by homeowners who couldn't afford the homes that they were buying and extracting equity loans from.

 

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