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You can't wave a magic wand and create real reserves to lend. Real credit comes from reserves of savings. This is about stopping a deleveraging process in the

You can't wave a magic wand and create real reserves to lend. Real credit comes from reserves of savings. This is about stopping a deleveraging process in the financial markets, not about ensuring the flow of credit to businesses. That's just the propaganda. Credit demand is collapsing as an economic bubble bursts and this is DRIVING the deleveraging. Not the other way around. If the economy were truly starved for credit you'd see 8% rates on CDs as banks scramble to raise reserves to lend out.

natrius 18y ago
"Credit demand is collapsing as an economic bubble bursts and this is DRIVING the deleveraging." You're going to have to explain that more. How does lower credit demand force deleveraging? I was under the impression that the deleveraging is being caused my huge losses on heavily levered investments. "If the economy were truly starved for credit you'd see 8% rates on CDs as banks scramble to raise reserves to lend out." The markets for debt have just taken a huge beating. I'm guessing the banks aren't meeting the demand for credit because it has just become more difficult to sell debt. If they are having issues with the loans they've already made, it's easy to see why they aren't rushing to issue more. I can't prove that the economy is starved for credit, but it's clearly the conventional wisdom. If you're going to call that propaganda, you need to prove that the conventional wisdom is wrong.
- kingkongrevenge 18y ago
  > I can't prove that the economy is starved for credit You can get a loan at very reasonable rates right now if you meet the criteria. That's just a fact, and I'm not in a mood to give you documenting links. Outstanding credit continues to grow at only a slightly lower rate than before. There is not a credit shortage. There is a shortage of viable uses for credit. There is huge overcapacity in retail, housing, etc. People who can't reasonably be expected to pay back loans can't get them right now. Which is basically a good thing. Businesses can't get loans to expand because nobody in their right mind thinks many kinds of business SHOULD be expanding. The macro-economic conditions are driving the markets, not the other way around. The financial firms are suffering because the REAL economy ran out of greater fools and hit its maximum tolerable debt load. The real economy is not shuddering because the masters in Wall Street can't grease the wheels; it's the other way around.
  - netcan 18y ago
    >"That's just a fact, and I'm not in a mood to give you documenting links" I would be interested in a link elaborating on your view. The facts I'll take your word on;) It sounds sensible to me & I am having trouble making sense of all this. It seems plasuible because -a- The US as a whole consistently borrow to spend. You need to run into a wall sometime. I'm not sure what the wall should look like. -b- I am aware of the credit stuff you're referring to. It's unwillingness to lend, not inability to that is crunching. Loans were defaulted on.
  - natrius 18y ago
    Hm... That's a possibility. Lower housing values led to decreased home equity, which led to decreased consumer spending, which led to lowered expectations for businesses, which led to fewer loans being made. If this is true, the bailout won't work and we'll head into a recession, possibly a severe one. However, I wouldn't say that's why the financial firms are suffering. They're suffering because they all made the same bad investments. Anyway, I doubt that the situation is as simple as what I've laid out here. I don't trust my previous justification for the bailout, but even the economists who opposed it said we still need to do something (http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm http://faculty.chicagogsb.edu/john.cochrane/research/Papers/...).
  - davidw 18y ago
    > You can get a loan at very reasonable rates right now if you meet the criteria. This is a good point, and one I've read elsewhere. However, I've also read this, which seems to add some nuance, if not quite contradict the above quote: "The interbank-funds market has seized up and even the most creditworthy corporate and financial firms are paying punitive rates." http://www.economist.com/world/unitedstates/displayStory.cfm?source=most_commented&story_id=12326538 http://www.economist.com/world/unitedstates/displayStory.cfm... It's possible those firms aren't really creditworthy, but giving the 'newspaper' the benefit of the doubt, this would make the situation a bit more complex than you paint it.
  - adrianwaj 18y ago
    Would be great to see an essay by you on this fiasco.

natrius 18y ago

"Credit demand is collapsing as an economic bubble bursts and this is DRIVING the deleveraging." You're going to have to explain that more. How does lower credit demand force deleveraging? I was under the impression that the deleveraging is being caused my huge losses on heavily levered investments. "If the economy were truly starved for credit you'd see 8% rates on CDs as banks scramble to raise reserves to lend out." The markets for debt have just taken a huge beating. I'm guessing the banks aren't meeting the demand for credit because it has just become more difficult to sell debt. If they are having issues with the loans they've already made, it's easy to see why they aren't rushing to issue more. I can't prove that the economy is starved for credit, but it's clearly the conventional wisdom. If you're going to call that propaganda, you need to prove that the conventional wisdom is wrong.

kingkongrevenge 18y ago
> I can't prove that the economy is starved for credit You can get a loan at very reasonable rates right now if you meet the criteria. That's just a fact, and I'm not in a mood to give you documenting links. Outstanding credit continues to grow at only a slightly lower rate than before. There is not a credit shortage. There is a shortage of viable uses for credit. There is huge overcapacity in retail, housing, etc. People who can't reasonably be expected to pay back loans can't get them right now. Which is basically a good thing. Businesses can't get loans to expand because nobody in their right mind thinks many kinds of business SHOULD be expanding. The macro-economic conditions are driving the markets, not the other way around. The financial firms are suffering because the REAL economy ran out of greater fools and hit its maximum tolerable debt load. The real economy is not shuddering because the masters in Wall Street can't grease the wheels; it's the other way around.
- netcan 18y ago
  >"That's just a fact, and I'm not in a mood to give you documenting links" I would be interested in a link elaborating on your view. The facts I'll take your word on;) It sounds sensible to me & I am having trouble making sense of all this. It seems plasuible because -a- The US as a whole consistently borrow to spend. You need to run into a wall sometime. I'm not sure what the wall should look like. -b- I am aware of the credit stuff you're referring to. It's unwillingness to lend, not inability to that is crunching. Loans were defaulted on.
- natrius 18y ago
  Hm... That's a possibility. Lower housing values led to decreased home equity, which led to decreased consumer spending, which led to lowered expectations for businesses, which led to fewer loans being made. If this is true, the bailout won't work and we'll head into a recession, possibly a severe one. However, I wouldn't say that's why the financial firms are suffering. They're suffering because they all made the same bad investments. Anyway, I doubt that the situation is as simple as what I've laid out here. I don't trust my previous justification for the bailout, but even the economists who opposed it said we still need to do something (http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm http://faculty.chicagogsb.edu/john.cochrane/research/Papers/...).
- davidw 18y ago
  > You can get a loan at very reasonable rates right now if you meet the criteria. This is a good point, and one I've read elsewhere. However, I've also read this, which seems to add some nuance, if not quite contradict the above quote: "The interbank-funds market has seized up and even the most creditworthy corporate and financial firms are paying punitive rates." http://www.economist.com/world/unitedstates/displayStory.cfm?source=most_commented&story_id=12326538 http://www.economist.com/world/unitedstates/displayStory.cfm... It's possible those firms aren't really creditworthy, but giving the 'newspaper' the benefit of the doubt, this would make the situation a bit more complex than you paint it.
- adrianwaj 18y ago
  Would be great to see an essay by you on this fiasco.