“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Thursday, February 18, 2010

Bank Credit Continues to Shrink. Where Will Growth Come From?

US bank lending falls at fastest rate in history

Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.

By Ambrose Evans-Pritchard, International Business Editor
Published: 8:43PM GMT 17 Feb 2010


David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.

Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken.

Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.

"It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.

Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues to contract" in their latest statement.
However, regional Fed "hawks" appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of "monetizing" its deficit in a stealth default on Treasury bonds.

The bank has already wound up its main liquidity operations. Concerns that the Fed may soon reverse quantitative easing altogether have caused a sharp rise in credit spreads in recent weeks.

Fed chair Ben Bernanke first made his name as an expert on the "credit channel" causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time.

"The reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this," said Mr Ashworth.


  1. Ok, I understand that less liquidity in the banks means less lending.

    It is obvious that people are saving more, so that means slower growth in sales.

    Slower growth in sales and less credit means slow to no job creation.

    Slower growth and anemic job creation means falling tax revenues.

    Falling tax revenues mean higher deficits.

    Higher deficits mean rising interest rates.

    I get all that, but at the same time we have this:

    Feb. 17 (Bloomberg) -- The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.”

    Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.”

    The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy.

    “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report.

  2. The recession wends its way along.

    Smoot-Hawley, and a new paradigm in needed labor was what made the Great Depression "Great."

    Oh, my internet was out most of the afternoon. I finally got a chance to take a look at treasury receipts/outlays. Kind of inconclusive. Slightly better than last year, but not enough to write home about.

  3. Too much bad stuff happened all at once for this to end up as a simple V-shaped "rocket launch."

    This will probably drag on for years in an undulating "good quarter - bad quarter" wearisome slog.

    It's not the "end of the world;" but it's not going to be "partying like '99," either.