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Credit Is Flowing, Sky Is Not Falling, Don’t Panic
By Robert Higgs on Sep 23, 2008
In democratic societies, every great surge of the government’s size, scope, and power rests on a foundation of fear, and the present occasion is no exception. The president, the secretary of the treasury, congressional leaders, and the vultures now swarming Washington to pick the remaining flesh from the taxpayers’ bones would have us believe that unless the colossal rip-off now being formulated in Congress is enacted, the future will be too horrible to contemplate.
Journalists, as usual, are doing their part to create an atmosphere of fear. Reports characterize the bailouts as “a bid to unlock the flow of credit” and make reference to “the frozen credit markets.” It’s hyperbole, don’t believe it.
Although certain financial institutions are undeniably in deep trouble—difficulties of their own making, we might add—the problems in particular financial circles should be kept in perspective. Note especially that credit markets in general have NOT ceased to operate. Moreover, lenders are extending credit in historically great amounts. To see this reality, however, we must break away from anecdotes in the financial press, which is eager to attract readers, and from fear-mongering by the political class, which is eager to seize more power, and examine the data that describe wider market transactions. For this purpose, the St. Louis Fed’s Web site is a useful resource.
Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This loan volume is 15.5 percent greater than it was a year earlier, and 30.8 percent greater than it was two years earlier. Frozen credit?
Consumer loans at all commercial banks, which are reported monthly, have also grown rapidly. The most recent report, for August 2008, shows outstanding loans of $845 billion, an all-time high. This loan volume is 9.2 percent greater than it was a year earlier, and 16.5 percent greater than it was two years earlier. Frozen credit?
Even real estate loans at all commercial banks, which are reported monthly, grew rapidly until very recently. The most recent report, for August 2008, shows outstanding loans of $3,642 billion, only slightly below the all-time high (in May 2008). This loan volume is 4.1 percent greater than it was a year earlier, and 15.5 percent greater than it was two years earlier. Frozen credit?
Lest one suspect that I have cherry-picked my examples, consider finally the amount of all bank credit at all commercial banks, which is reported weekly. For the most recent week reported, the one that ended on September 9, this credit amounted to $9,406 billion, which is only slightly less than the all-time peak of $9,485 reached in the week that ended on March 26, 2008. For the past six months, total commercial bank credit has remained on a high plateau, well above the levels reached in previous years, when everybody seemed to think that credit was ample.
One might object that a leveling off, after a long period of steady, rapid growth does constitute a substantial change in credit-market conditions. True, enough. But we must also recognize that the rapid growth of credit during the years from 2001 to 2007 was scarcely a healthy development. In fact, this effusion of credit fueled the housing bubble and countless other malinvestments that now must be liquidated, because without a continuation of the very-easy-money regime, these projects cannot be brought to completion or, if already complete, operated without further loss.
That malinvestments must now be liquidated merely reflects the mistakes made in the past, induced by bad government policy at the Fed and other credit-related agencies, such as Fannie and Freddie. Of course, some of the necessary adjustments will be painful for the parties directly involved. But the huge bailout now being concocted in Congress will only compound the errors of the past by keeping some malinvestments on life support, deferring the day that lenders must write off bad debts, and preventing the entire financial system from returning to a semblance of economic viability without ongoing subsidies and bailouts that impoverish the taxpayers and threaten the entire economy.
For now, however, the important point to recognize is that the sky is not falling. Lenders continue to lend at high rates, and the economy continues to operate reasonably well. If people panic and allow Congress to exploit the hyped-up fears of the moment, however, much worse outcomes may be brought about, not the least of which is another giant leap in the size, scope, and power of the federal government—a direct threat to our economy and our liberties.
After reading the above, I researched the subject a little and wound up posting the following,
which looks at the subject from a slightly different angle.
It look like the American Publlic is being attacked by a horde of "Chicken Littles" and fear mongers
who believe that it is easier to have influence over others when they are frightened.
I am posting it here -- just so I can find it easier (mrc)
Friday, September 26, 2008
Let the banks take their lumps
The data is from The Federal Reserve Bank of St. Louis / < http://research.stlouisfed.org/fred2/series/REALLN >
Real Estate Loans at All Commercial Banks. The market is not frozen. Let the banks take their lumps.
Date / Value of National real estate loans in $ Billions
4/01/08 / 3,651
5/01/08 / 3,653
6/01/08 / 3,644
7/01/08 / 3,623
8/01/08 / 3,642
1) The numbers are in billions -- so 3,642 = $3.642 trillion
2) Therefor --- in September the banks lent $3.642 trillion minus $3.623 trillion -- or $19 billion -- so the credit market is not "frozen"
3) I know from reading about defaults on Real Estate loans -- that defaults never go as high as 4%
4) If 4% of all the existing $3.6 (rounding) trillion in loans go into default -- that is $.145 trillion or $145 billion
5) Paulsen and Bush want the right to spend $700 billion, with virtually no oversight, to ward off financial disaster. That does not make sense.
6) The government could buy all the loans that are likely to default for $145 billion. Why should they spend five times that amount?
7) Why and how would they spend $700 billion?
8) And note -- those defaulting loans do not mean there is no value in the property. Each property can probably be sold for 50% of the book value of the loan at an auction -- so the worst case would be that $72.5 billion will be "lost" (1/2 of $145 billion). And it would not be the borrowers that lose that money -- they will only, in the worst case, lose whatever down payment they made -- which would be less than 20%. The loss ($72.5 billion) would be borne by the foreclosing bank. And why should the lending bank be protected? Aren't losses part of their cost of doing business -- shouldn't that be their risk?
Remember -- the banks were and are collecting something like 6% interest per year on the entire $3.6 trillion -- that is about $200 billion / year or $16.6 billion / month. That $72.5 billion is trivial when compared to the $200 billion they have been making, and will continue to make every year. The banks will make that one-time loss back in less than five months.
Write to everyone you know to stop this giveaway by Congress and power grab by The President.