Submitted by CARPE DIEM

Annual Growth, Commercial Bank Loans, to 4/14/08
Media hysteria over the mortgage crisis is almost certainly misleading countless people about prospects for the real economy.

The focus of the gloomy economic news is on a “credit crisis” or “financial crisis.” Yet postwar US financial crises have never resulted in economic disaster. Think of the savings & loan (S&L) crisis of 1986-1995 — a period that also saw Black Monday (Oct. 19, 1987), when Dow stocks fell 22.6%. The S&L crisis lasted from 1986 to 1995, and was undoubtedly the worst US financial crisis since World War II. Yet the real economy grew by 2.9% a year over that period.

Some papers can’t get anything right. An April 6 New York Times piece (”Almost as if The Sky Were Falling,” on stock prices) claimed that the “focal point for the stock market’s difficulties” is that “banks have been reluctant to lend money to one another, or to anyone else.”

If banks were reluctant to lend to “anyone else,” then bank loans wouldn’t have increased by 8% percent (as Fed data say they have) since last August (and by more than 10% since last year, see chart above), when the mortgage crisis first emerged. The phrases “credit crisis” and “credit crunch” are not about bank loans, as most suppose, but about difficulties in selling or valuing exotic securities.

~Cato Institute’s Alan Reynolds

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