The Financial Crisis and Business Loans: The "Credit Crunch" That Isn'tSubmitted by Republicae on Mon, 01/05/2009 - 15:23
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.
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 committments. 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 commerical and industrial loans, while 47 percent said they "tightened somewhat," and over 28 percent said they had kept their lending practices "basically unchanged."
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