What Credit Crisis?

One of the reasons cited by the White House and leaders of both parties in Congress for doing "something" about the economic mess on Wall Street was that without action by the U.S. government, there would be a "credit crisis" in which consumers would be unable to secure personal or auto loans, mortgages, or even credit cards.

But was the hype about a credit crisis just that - hype?

I ask this question because it's been about a month since the financial woes on Wall Street began to surface, and there is no visible evidence of this credit crisis, at least that I can see. I have continued to receive solicitations for credit cards, personal loans, and automobile financing in the mail, and there is no indication from my bank that any loan I might attempt to secure would be denied. So the offers keep coming, even though Congress and the White House didn't act on a bailout plan until just a few days ago.

Alan Reynolds of the libertarian Cato Institute, writing for Forbes.com, says the ringing of alarm bells about a credit crisis has been unwarranted. Mr. Reynolds cites some of the warnings I mentioned above, such as the one from Congressional Budget Office Director Peter Orszag, who said "short-term lending was virtually shut down." And a Washington Post report that said "tightening [bank] credit conditions are already affecting some consumers and business," or the Fox News report saying that "McDonald's can't even get a loan." Then there's House Majority Leader Democrat Steny Hoyer, who said the bailout plan was designed to "unlock the credit," and a Wall Street Journal writer saying "Until we get the banks lending again, the economy will continue to contract."

So why does Reynolds say the alarms are unwarranted. Because, he says, "Such alarming comments never mention any facts." Those facts, Reynolds says, are that data for August reveal "...bank loans to consumers were 9.5 percent higher than they were a year earlier - the fastest increase since 2004." And, he says, "Real estate loans were up 4.1 percent for the 12-month period ending this August...."

Now, some will say the financial crisis started the first week of September. Reynolds responds by saying, "The latest data is for the week ending Sept. 17, when the U.S. expropriated 80% of AIG...equity and thus tanked most financial stocks. U.S. bank credit hit a record of over $7 trillion in the latest week - up from $6.57 trillion a year earlier and $6.92 trillion at the end of July."

And, he says, "Contrary to many comments, consumer and industrial loans actually increased in the latest week. Troubled giant banks have cut back on lending, but smaller banks have picked up the slack. Consumer and real estate loans dipped insignificantly through Sept. 17, remaining much higher than they were a year earlier."

So, Reynolds concludes, "Everyone knows that U.S. banks have virtually stopped lending, deeply slashing their loans to U.S. consumers and firms. As is so often the case, however, what everyone knows is probably not true."