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Credit Crunch? What Credit Crunch?

By Michael Kling   |   Friday, 24 Oct 2008 03:55 PM

The much-discussed credit freeze that is reportedly grinding business to a halt is a myth.

The belief that consumers and nonfinancial companies can’t get loans, that interbank lending has disappeared, and that commercial paper has dried — all myths, according to a study by three economists at the Federal Reserve Bank in Minneapolis.

Fed economists V.V. Chari, Lawrence Christiano, and Patrick Kehoe admit there’s a financial crisis, but they say its impact on the general economy so far has been greatly exaggerated.

Using data from the Federal Reserve Board, they argue that the overall volume of commercial bank loans and leases, commercial and industrial loans, consumer loans and bank credit, or the aggregate amount of assets held by banks not counting vault cash, has not fallen.

At least that the case of Oct. 8 when the information was gathered, they say.

While commercial paper from financial companies has fallen, commercial paper from nonfinancial institutions remains essentially unchanged.

Interest rates for nonfinancial companies have barely budged, and rates for financial companies, while higher, remain within historical levels.

Differences between Treasury securities yields and interest rates on loans with corresponding maturities, or spreads, have skyrocketed. Many believe that means borrowing costs have increase.

Wrong, the economists say. Spreads are wider because investor flight to quality has driven down Treasury yields. Loan interest rates are actually historically low.

Commercial and industrial loans have jumped. Some say businesses are drawing on their credit lines while they still can, while loans to business without such commitments has dropped, signaling a sharp drop in future bank lending.

There’s no evidence to support that theory, the economists assert.

The study “confirms what a lot of healthy banks have been saying — that they have the capital and resources to continue making loans,” James Chessen, the chief economist at the American Bankers Association, told the American Banker

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The much-discussed credit freeze that is reportedly grinding business to a halt is a myth.The belief that consumers and nonfinancial companies can’t get loans, that interbank lending has disappeared, and that commercial paper has dried — all myths, according to a study by...
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