In our local area forecast this month, I wrote the following paragraph:

What we await is the restoration of trust in financial transactions and between banks, which accounts for the sharp increase in banks� holding cash rather than lending to customers. That will take some time, and no government policy will quicken the rate at which banks will decide to lend again. But lending is how banks make money, and at some point they will. I think sooner, rather than later.

Bert Ely, earlier this week in the Wall Street Journal, agrees:

Banks are in the lending business: They do not need to be forced to lend. And contrary to popular and political opinion, banks have not stopped lending. Despite the recent financial market turmoil, a declining GDP, and an increase in loan-loss reserves, commercial bank lending actually grew $336 billion, or 4.9%, from August to Dec. 24, according to Federal Reserve data. While lending dictates or other restrictions may be tempting, the Obama administration must discourage Congress from imposing them on recipients of TARP investments.

Mark Perry provides the graphic confirming Ely's point, but the graph simply has a huge jump in September 2008 and then a decline. I think it's probably the conversion of former investment banks Goldman Sachs and J.P. Morgan into commercial banks that makes that jump. (See the jump in credit in the October 10 H.8 report.) That doesn't make the credit crunch any less bad than it is.

But it IS getting better, and the Federal Reserve is beginning to unwind some of its lending, indicating further some calming in the market. The markets expected the jobs report today (as I write this, the Dow is down less than eighty points); it might be finally the case where we are seeing a more forward-looking stock market, which would be a welcome relief.

Labels: economics