At a meeting with community bankers -- whom he absolved of guilt in the financial crisis -- President Obama suggested that perhaps, just perhaps, the banks have been hit a little too hard with regulators scrutinizing loans.

Business loans on the balance sheets of all federally insured U.S. banks fell $89.1 billion, or 6.5%, from July 1 to Sept. 30, according to the Federal Deposit Insurance Corp. That was part of a $210-billion drop in overall loans outstanding, the largest such decline since at least 1984.

"In some ways, the pendulum may have swung too far in the direction of not lending, after a decade in which it had gone way too far in the direction of getting money out the door, no matter the risk," Obama said. "If we can get that balance right . . . there are businesses and communities out there that are ready to grow again."

Prof. Charles Goodhart is seeing a similar story in Britain.

"What has happened to all the monetarists? Growth in money holdings and lending has plummeted. Thirty, or 40, years ago they would have been forewarning doom and destruction at this juncture, and casting anathemas at the authorities," he wrote in a consultant report for Morgan Stanley.

"There is a danger that markets and authorities become obsessed about the fiscal implications of the crisis at a time when the real worries should still focus on private sector access to credit and money."

Did anyone ask Bernanke about this in confirmation hearings earlier in the month? No, and the closest answer we got in written responses was that to Brad DeLong's 3% inflation target question, which Scott Sumner excoriated.

The risk is that we don't know where the Fed is heading next between this and the . Nariman Behravesh of Global Insight is nervous:

"Any number of risk could knock us back down into recession," ... These risks include botched monetary policy by the Fed, a major retrenchment of consumer spending in the face of rising unemployment, and another chapter to the financial crisis.

Behravesh isn't saying it's the most likely scenario; but at 20% the probability is "too high" for his liking.

Would tightening credit in Q1 or Q2 be an example of "botched" monetary policy? (Thanks to Gary for the last link.)

Labels: economics, Federal Reserve