Federal data suggests the credit crisis is not nearly as severe as officials would have us believe, a new report contends – in fact, overall lending by U.S. banks is at a record high and has actually increased since the crisis began.
“We find irreconcilable differences between the public pronouncements of leading U.S. policy-makers and information published by the very institutions they lead” including the chairman of the Federal Reserve Bank, Ben Bernanke, and Treasury Secretary Henry Paulson, the report contends.
“In repeated areas, the key assumptions about U.S. credit markets being made by these policy-makers are not supported, or are flatly contradicted, by the available data.”
Common wisdom has it that banks have cut back dramatically on lending: individuals can’t get mortgages or credit cards, and businesses can’t get loans to expand, said Octavio Marenzi, CEO of Boston-based Celent and the author of the report.
But the numbers belie that perception.
A few big institutions are facing serious problems, but the analysis, based on publicly available Fed data, says the industry overall is not suffering major effects.
For example, far from being paralyzed, inter-bank lending reached its highest level in September 2008, and is up 22 percent since the start of the crisis – a direct contradiction to statements made by Paulson and Bernanke, the report contends. Household debt burden as a percentage of income was also near record highs of 19 percent at the end of the second quarter 2008, and bank real estate lending reached a record high in October 2008.
“Banks have not curtailed their lending,” Marenzi said.
Phantom Data?
The authorities may have access to data that is not publicly available, but Marenzi said if so they should release that data to better support their public statements. More likely, he says, they are just extrapolating from the experiences of a few big banks to the whole system.
Sub-prime lending is down compared to the increases overall, he said, but that’s “a very healthy reaction … certain banks took on irresponsible levels of risk, lending to people they shouldn’t be lending to.”
The decline in sub-prime does mean some struggling businesses are having trouble obtaining credit, however, “a banking system that declines to extend credit to money-losing businesses is not a system that is flawed, it’s a system working as it should.”
Looking at a timeline of credit activity during some of the big bank failures, Marenzi said, “None of them have had a major impact in terms of bank lending activity. That sort of raises the question, are these institutions too big to fail? Would the economy as a whole not benefit better from an orderly winding down of some of these institutions that are basically insolvent?”
Marenzi said there is no denying there’s a recession, adding that it is likely that lending will decrease somewhat over the next few years. However, that decrease in lending is a natural and normal part of the economic cycle.
“If you look at the rate the commercial lending has been increasing it doesn’t look sustainable – at some point people are going to say I don’t need any more money,” especially in the current recession. But “that’s not a market failure in the credit market, that’s sound business judgment.”
