Tuesday, November 18, 2008

Credit crunch update

In a previous post on credit crunch, I was ready to believe there was some evidence of a credit crunch. An update on some other blog posts - this time on credit cards:

1. MR:
But even so:
Despite the decline in offers for new cards, US consumers still have access to an increasing amount of credit. Household credit lines across all cards edged up to an average of $27,626 per household (YTD 3Q 2008) from $26,902 in 2007 despite evidence that issuers are cutting credit lines on certain customers.
..."Much has been reported about issuers reducing credit lines for certain customers but this is not the case for the majority of people. Across the industry as a whole, we continue to see credit access and usage at record high levels" said Davidson.

2. Megan Mcardle conducts some self-experimentation:
Result: Instant new credit of about 10% of my annual income from the two that approved me within two minutes. American Express very sensibly makes you wait a few ways for your exclusive Costco membership card/Amex, and when they notice that I seem to have a sudden interest in acquiring large amounts of new credit, I imagine they might just turn me down. The terms on both cards were attractive, with a 0% one year introductory APR, collision liability waiver for car rentals, and other perks that might tempt someone who already has way too many airline miles.

Talking to someone reminded me that perhaps my feelings are based on the fact that we are in Washington DC which tends to be less recession prone than other regions of the country.

3. Finally, some more general observations:
... lending has decelerated; but if anything it is reverting back to a historical average rather than contracting outright. In fact, on November 5, real estate lending grew at a 6% annual rate, commercial & industrial lending at a 15% annual rate, and consumer lending at a 10% annual rate.
Quoting WSJ:
Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15% from a year earlier and grew at a 25% annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21% from a year ago and grew at a 48% annual rate in three months.

The numbers point to one of the great challenges of the crisis. The credit crunch is surely real, but it is complex and not easily managed. Banks are lending, but they're also under serious strain as they act as backstops to a larger problem -- the breakdown of securities markets."

... the WSJ implies that Scharfstein and Ivashina do not actually solve the paradox, bank lending is flowing in spite of a credit crisis in the financial system. Scharfstein and Ivashina (via the WSJ article) simply suggest that banks are crowding out new lending, i.e., the drawing on already existing lines of credit are reducing the availability of new business lending. The implication is the following: had the existing lines of credit not been in place, there would be new lending. The paradox has not been solved.

4. From John Quiggin's Blog though not John Quiggin himself a chart of the money multiplier as evidence of a credit crunch:

I was curious what it would look like with a longer time frame. (Too bad it only goes to 1984.)

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