I just received a copy of a report published by Celent on the flawed assumptions underlying the so-called credit crisis:
In many cases, it appears that these policymakers’ assumptions regarding the credit crisis are incorrect. Far from seeing a tightening of credit, a number of measures show that credit has expanded, and Celent finds that the lending markets are in surprisingly good health. Data published (in most cases by the Federal Reserve itself) show that:
Overall lending by US banks is at a record high and has increased during the credit crisis. Interbank lending is at record highs and has increased during the credit crisis. Consumer credit is at record highs and has increased during the credit crisis. Commercial paper markets are operating within their historical norms. Lending by banks to businesses is at record highs and has been growing rapidly. Municipal bond markets are operating within their historical norms. Deposits at banks have shown a substantial increase since the start of the credit crisis.
Contrary to popular belief, the accompanying graph demonstrates that commercial lending has increased by $1 trillion since April 2007, even as mortgage lenders, the housing market, financial government institutions are on the brink of collapse.
There’s something happening here. What it is ain’t exactly clear.
As Glenn Beck would say, “I’m not an economist, but I am a thinker.” Generally, when an industry enjoys a 15% increase in sales, that’s considered a good thing. Yet this $1 trillion increase in commercial lending has led to the failure of the largest sub-prime lender, New Century, followed by Bear Stearns, Lehman Brothers, the collapse of Fannie Mae and Freddie Mac, and bailouts of AIG and Citibank.
This leads me to believe that the underlying economic problem just might be the result of too much, rather than too little lending, at rates that are too low, rather than too high.
Is this concept really so difficult that two geniuses like Ben Bernake and Henry Paulson can’t figure it out?
There seems to be a vast cognitive disconnect between what our politicians and bureaucrats are saying and the underlying economic crisis. As anyone who’s read George Orwell’s famous 1946 essay on Politics and the English Language can appreciate, when politicians/bureaucrats say “tightening of credit”, what they really mean is tightening of credit for people who are bad credit risks. People with good credit can borrow as much as they want. The problem is people with good credit tend to borrow a lot less than banks and politicians want us to borrow.
Our politicians recognize the problem: consumers, corporations, governments have all borrowed too much. We live way beyond our means and have finally reached the tipping point where rational lenders refuse to extend any more credit. However, their “solution” is to tamper with free market mechanisms as much as possible so that maxed-out credit card holders, compulsive shoppers, over-leveraged homeowners and corporations with “cash flow problems”, as the euphemism goes, can continue to borrow and spend, and borrow and spend some more.
There was a television show in the late 60’s, “Run For Your Life”, starring Ben Gazzara as a successful attorney who is told by his doctor in the first episode that he has just one or two years to live. He decides to do all the things he never had time for, trying to cram a lifetime of experiences into what little time he had left. I once saw a parody of that show in which the Gazzara character tells his financial adviser that he’s going on a huge shopping spree, funded by maxing out his credit cards, then applying for more credit cards to cover the minimum payments and maintain his extravagant lifestyle. “I have enough credit cards to last 18 months or more,” he says.
His adviser cautions: “But after 18 months you’ll be dead broke.”
“Well, you’re half right.” That investment strategy seems to have made a comeback.
Our brave new capitalism is no longer based on “laissez faire”, but on “laissez les bon temps rouler”. Unfortunately, we have run out of bon temps left to rouler.
Tonight we’re still partying like it’s 1999, but it’s eight years past two thousand zero zero, oops out of time.
We’re running on — running on empty, running on — running blind.
Running into the sun, but we’re running behind.