Credit Is Flowing, Sky Is Not Falling, Don’t Panic
By Robert Higgs • Tuesday September 23, 2008 8:03 AM PDT • 62 Comments
In democratic societies, every great surge of the government’s size, scope, and power rests on a foundation of fear, and the present occasion is no exception. The president, the secretary of the treasury, congressional leaders, and the vultures now swarming Washington to pick the remaining flesh from the taxpayers’ bones would have us believe that unless the colossal rip-off now being formulated in Congress is enacted, the future will be too horrible to contemplate.
Journalists, as usual, are doing their part to create an atmosphere of fear. Reports characterize the bailouts as “a bid to unlock the flow of credit” and make reference to “the frozen credit markets.” It’s hyperbole, don’t believe it.
Although certain financial institutions are undeniably in deep trouble—difficulties of their own making, we might add—the problems in particular financial circles should be kept in perspective. Note especially that credit markets in general have NOT ceased to operate. Moreover, lenders are extending credit in historically great amounts. To see this reality, however, we must break away from anecdotes in the financial press, which is eager to attract readers, and from fear-mongering by the political class, which is eager to seize more power, and examine the data that describe wider market transactions. For this purpose, the St. Louis Fed’s Web site is a useful resource.
Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This loan volume is 15.5 percent greater than it was a year earlier, and 30.8 percent greater than it was two years earlier. Frozen credit?
Consumer loans at all commercial banks, which are reported monthly, have also grown rapidly. The most recent report, for August 2008, shows outstanding loans of $845 billion, an all-time high. This loan volume is 9.2 percent greater than it was a year earlier, and 16.5 percent greater than it was two years earlier. Frozen credit?
Even real estate loans at all commercial banks, which are reported monthly, grew rapidly until very recently. The most recent report, for August 2008, shows outstanding loans of $3,642 billion, only slightly below the all-time high (in May 2008). This loan volume is 4.1 percent greater than it was a year earlier, and 15.5 percent greater than it was two years earlier. Frozen credit?
Lest one suspect that I have cherry-picked my examples, consider finally the amount of all bank credit at all commercial banks, which is reported weekly. For the most recent week reported, the one that ended on September 9, this credit amounted to $9,406 billion, which is only slightly less than the all-time peak of $9,485 reached in the week that ended on March 26, 2008. For the past six months, total commercial bank credit has remained on a high plateau, well above the levels reached in previous years, when everybody seemed to think that credit was ample.
One might object that a leveling off, after a long period of steady, rapid growth does constitute a substantial change in credit-market conditions. True, enough. But we must also recognize that the rapid growth of credit during the years from 2001 to 2007 was scarcely a healthy development. In fact, this effusion of credit fueled the housing bubble and countless other malinvestments that now must be liquidated, because without a continuation of the very-easy-money regime, these projects cannot be brought to completion or, if already complete, operated without further loss.
That malinvestments must now be liquidated merely reflects the mistakes made in the past, induced by bad government policy at the Fed and other credit-related agencies, such as Fannie and Freddie. Of course, some of the necessary adjustments will be painful for the parties directly involved. But the huge bailout now being concocted in Congress will only compound the errors of the past by keeping some malinvestments on life support, deferring the day that lenders must write off bad debts, and preventing the entire financial system from returning to a semblance of economic viability without ongoing subsidies and bailouts that impoverish the taxpayers and threaten the entire economy.
For now, however, the important point to recognize is that the sky is not falling. Lenders continue to lend at high rates, and the economy continues to operate reasonably well. If people panic and allow Congress to exploit the hyped-up fears of the moment, however, much worse outcomes may be brought about, not the least of which is another giant leap in the size, scope, and power of the federal government—a direct threat to our economy and our liberties.
Tags: Bailouts, Budget and Tax Policy, Business, Economics, Fascism, Housing, Money and Banking, Politics, Taxation 
The government intervention launched last week was a response to a meltdown that occurred only last week. Data prior to that point are irrelevant.
Last week the unwind became so rapid that regular lines of credit really were in danger. E.g., for a day or two the commercial paper markets that keep businesses running locked up. If that had continued for even a few more days you really would see the economy start to grind to a halt.
See my post yesterday for details on how this could happen and under what conditions the government should be allowed to intervene to “bail out” markets.
Federalist | Sep 24, 2008 | Reply
Where is the money for the bailouts coming from? Is it deficit financing or tax revenue?
Sukrit | Sep 24, 2008 | Reply
Does this support the inflation hypothesis rather than the hypothesis that banks are going to all collapse and thus we will have deflation?
Will | Sep 24, 2008 | Reply
We go through up and down cycles, and yes the sky is not falling. Responsible accountable leadership is what we need at the moment not bailouts that serve as having a temporary Band-Aid until the next problem surfaces. It is very disturbing to see that part of the deal is for them to have no one look into their affairs for long periods of time.
C. Michael | Sep 24, 2008 | Reply
My response to the bailout will be immediate. I’m pulling out all my money that is in a money market(cash) and taking it home. That will relieve my bank of approx 750 of loan potential..that’s based on our great fractional reserve .
robertsgt40 | Sep 25, 2008 | Reply
Bailouts, yet another infringement on our rights by the gov’t. Add it to the ever-growing list of violations:
They violate the 1st Amendment by opening mail, caging demonstrators and banning books like “America Deceived” from Amazon, Wikipedia and Facebook.
They violate the 2nd Amendment by confiscating guns during Katrina.
They violate the 4th Amendment by conducting warrant-less wiretaps.
They violate the 5th and 6th Amendment by suspending habeas corpus.
They violate the 8th Amendment by torturing at Gitmo.
They violate the entire Constitution by starting illegal wars without declaration.
Impeach them all (both parties) and save this great country.
Last link (unless Google Books caves to the gov’t and drops the title):
http://www.iuniverse.com/Bookstore/BookDetail.aspx?BookId=SKU-000083883
Evan H | Sep 25, 2008 | Reply
consumer loans would naturally be higher
as more loans have reset at a higher rate
bill | Sep 25, 2008 | Reply
Mr Higgs: This less than cursory review is unworthy of you. The real issue is not levels of credit, but the risk of that credit being called. The real risk of the entire financial world lies with Derivatives, with USA most vulnerable.
al zurzin | Sep 29, 2008 | Reply
This is just reckless conjecture. I don’t even know where to start. At the very least look at where the money is coming from to sustain the loans you reference. http://research.stlouisfed.org/fred2/series/TOTBORR?cid=122 If that doesn’t make you nervous look at this. http://research.stlouisfed.org/fred2/series/BOGNONBR?cid=123 I would also suggest a look at non-performing loans and charge offs on the same website. We will have to pay for those non-performing loans with the bailout today or a long painful recession tomorrow. There is no free lunch in a free market.
Chad S | Sep 29, 2008 | Reply
A sure sign of a good book is that you like it more the older you get.
make quick money | Oct 14, 2008 | Reply
Dr. Higgs is right. I still get house refinance and credit card offer junk mail all the time. No shortage of willing lenders here! If deadbeat borrowers can’t get credit anymore, uh, who’s problem is that?
JR | Oct 21, 2008 | Reply
The real problem is threefold:
1.) Attempting to run an allegedly “capitalist” economy on “credit,” instead of on _CAPITAL_. The current “creditalist economy” fallacy extends all the way up to the Fed itself, which attempts to “create” the “currency supply” (note that Federal Reserve Notes are _currency_, NOT money!) by “loaning it into existence.” Nearly every “central bank” in the world systems is a giant Ponzi Scam based on unsecured debt.
2.) A tax and regulatory system that sets up perverse economic incentives by punishing individuals and institutions for saving and investmenting — which are the _true_ sources and wellsprings of Capital — while simultaneously rewarding them for spending themselves into debt.
3.) A Gov’t whose officials systematically distort nearly every economic statistic that they publish (AKA “adjustments”) in order to make the state of the economy look systematically better than it actually is. Prices are signals, and Marketplaces are information exchanges. Systematically send buyers and sellers false price signals and the Marketplaces false information in the false belief that doing so will “Bolster Consumer Confidence” and “Guarantee Sustained Growth,” and you will inevitably see malinvestments and bad business decisions arising from that false information.
Many politicians and policy wonks keep falsely attributing the current financial crisis to a “Lack of Confidence.” But the Marketplace is not “Tinkerbell;” it runs efficiently only when buyers and sellers are presented with TRUE INFORMATION, not propaganda and contrafactual “beliefs.” The Market will NOT magically get better if we all just clap our hands and say, “I _DO_ believe in the Fed! I do! I do! I do!”
The “bubbles” and crashes in the Market will continue to be enormously exacerbated as long as the Fed and Administration officials continue to send false signals to the Marketplace, by persistently confusing “spending borrowed currency” with “wealth creation” and systematically “adjusting” economic statistics toward the “pollyanna” direction.
In summary: If someone tells too many lies to too many people, and they keep telling lies long enough, sooner or later SOMEONE is going to get badly hurt by those lies (preferably the liar). Sadly, the people who are getting most of the blame for their lies right now are the second-order liars, not the first-order liars. (The first-order liars are instead being rewarded for their lies by getting handed enormous increases of power, plus huge piles of “borrowed” (i.e., tax-extorted) “bailout money” to hand over to themselves, their friends and their cronies.)
gdp | Nov 3, 2008 | Reply
I found something called a cpn number that will
give you a new credit profile within 30 days.
the website is
http://www.creditmenow.info
carluew | Nov 18, 2008 | Reply
why isnt sen. christopher dodd and barney franks facing ethics violations due to theirlack of oversight of the banking comittees and in sen. dodd’s case acceptingof favorable loans from the same crooked members of the banking community that it was dodd and franks duty to oversee. not to worry! the taxpayers will foot the bill and at the same time get low rates on their ira cds. at the same time the banks play both ends against the middle. they get free taxpayer dollarsa and pay their depositors less!
chas. parslow | Dec 5, 2008 | Reply
And what do you think about energy problem in the Ukraine?
Lucia | Jan 18, 2009 | Reply
Good night, bloggers =)
Karina | Jan 19, 2009 | Reply
It’s hard to understand..
Oktra | Jan 20, 2009 | Reply
Nice! I’ll make similar post in own blog
Lady | Jan 22, 2009 | Reply
what a nice story..
Lerika | Jan 22, 2009 | Reply
Some very insightful and well thought out comments on this Blog. As a Mortgage Professional in Minnesota I can confirm that credit is available out there, the biggest issue I am seeing with people refinancing is the lack of equity. I am seeing at least a 20% loss of equity on the appraisals we are having done.
Sean Wait MN Home Mortgage Guy | Jul 24, 2010 | Reply
Thanks for sharing the cdn number carluew I am off to dig deeper in right now.
Jim | Jul 25, 2010 | Reply
Credit is not flowing in the states or Oregon and Washington. As sellers are losing equity, buyers are having a hard time getting in on the lower prices due to the much stricter lending requirements.
Randy | Jul 25, 2010 | Reply
I ran across this blog doing some research. I would be interested in knowing if you still feel the way you did in 2008. I hear horror story after horror story about businesses unable to get their commercial real estate loan refinanced. Maybe they’re the exception but I don’t think so.
Ron Stone | Jul 26, 2010 | Reply
I was wondering the same thing as Ron. Seems that the bottom has really fallen out.
Edwin Brown Subject to Investor | Jul 26, 2010 | Reply
At least in the residential marketplace, credit cannot “flow” without the stated-income loans.
Eric Forster | Jul 27, 2010 | Reply
Awesome Information! I love this site.
Mr. Donnahue The Credit Guru | Jul 27, 2010 | Reply
I think we are just seeing the tip of the iceberg on this one.
Joe at home in Seattle | Jul 28, 2010 | Reply
People today are asking if they can be approved for a loan if they have credit problems?
One answer is that most likely, however it depends on just how poor your credit rating really is, along with other factors such as Loan to Value and Debt-To-Income Ratio
Steve Sell your house | Jul 30, 2010 | Reply
Working in the real estate industry, credit is also an ebb and flow problem. I think it’s great that we’re now ensuring that people will be able to pay their loans—although the regulations are so tight at times it makes it hard to find a viable customer. All in due time, I’m sure we’ll find a happy medium.
Sandra 'Luxury Homes' Wilken | Aug 3, 2010 | Reply
We allowed this to happen. It’s not like we had a choice in the matter. Just look at the sheep in front and follow because surely there is someone following you.
phoenixhudhomes | Aug 7, 2010 | Reply
I am lucky to be in a the small Texas town of Fredericksburg where prices have held strong and money is still flowing (provided you should be getting a loan). Like I said I am lucky because the whole Federal Reserve System ( a private bank with the authority to create money from nothing) will continue to cause problems with the nations economy as a whole.
God Bless America and my we all start reading the constitution, if we can start following the precepts therein and limit Washington to doing the same we will all be in better shape.
Mike Starks | Aug 13, 2010 | Reply
The money is still flowing everywhere just in different places and in different directions. I am in the real estate investing industry and you would not know there was a recession from where I am standing. There are plenty of average American’s still buying homes and not just for investments. If the government is not going to help get money flowing the American ppl will.
Kenny Rushing the Bulk REO Trader | Aug 18, 2010 | Reply
I don’t think we’ve even seen the full ramifications of this nightmare yet. I can tell you this. After hearing what Obama had to say this weekend, I’m more than a little freaked out.
Eric Medemar | Sep 2, 2010 | Reply
Our market here in North Texas was doing great but just recently after the tax breaks ended, no one is buying homes here. It is the worst I have seen it in 20 years. It is too hard to get credit. That is the biggest complaint that I have been hearing.
Phil Kretchmar | Sep 11, 2010 | Reply
I certainly hope that the recession will finally be over. A lot of people have pent up complaints about this and are secretly praying that all of this would just go away.
real estate photography gold coast | Oct 13, 2010 | Reply
We the people are getting gouged worse every year, for trying to better ourselves. I believe that at some point in the future things will get better. Thanks for the information above. I just hope that this makes a lot of sense to all people why they should start investing for themselves.
Boise Property Management | Oct 28, 2010 | Reply
I really agree with your post. I think the fear that media puts into people is one of the underlying reasons for the poor economy in the country. The more people hear “doom and gloom” the more they believe it and it manifests itself. We need to have more positive news to turn this economy around.
Sell House Fast Guru | Nov 10, 2010 | Reply
I’d like to know how this author came to this conclusion. Does he operate a small business? Or is he/she merely an academic quoting sources that could be construed as being manipulated?
Technically, this author may be correct; pragmatically I think this author is incorrect as smaller businesses are still getting squeezed. I would suggest he or she initiate a study of smaller businesses to see how the current credit/lending environments have affected them.
Quoting the St. Louis Fed’s website is by no means a prolific method to determine the pulse of the U.S. lending business.
Sal Buscemi- Commercial Investing | Nov 30, 2010 | Reply
The flow of credit is not at all what it needs to be. I am not one of those who would suggest that credit needs to flow like it did in the “good old days”. Credit was WAY too free for way to long. That is what caused the current economic downturn—too much credit extended to too many people who did not deserve it. However, the flow of credit needs to increase to deserving small businesses who employ the majority of the American workforce.
Jeremy | Dec 2, 2010 | Reply
I agree that the flow of credit is not where it needs to be. Although it does seem to be improving somewhat in my area. Banks and Government have to find a middle ground to get the flow where it should be.
Melissa | Dec 17, 2010 | Reply
I keep hearing about getting credit.....when do people start being responsible for there actions? Start educating yourselves and don’t use so much credit. What happened to saving some money?
Don Edmunds-Oshawa Realtor | Jan 6, 2011 | Reply
I have to say that I was fairly fortunate with the GFC. My superannuation fund took a sudden loss at the start but then recouped it’s losses to make a profit of 13% by the end of the financial year. That figure was a LITTLE lower than the average of 17% for previous years but still a respectable profit.
Julia | Feb 26, 2011 | Reply
Times are tough but things always get better.
Hopefully lenders will be able to decrease interest.
Real Estate San Diego | Mar 5, 2011 | Reply
This article has been a good prediction...
Credit did not entirely crash. Banks are back to lending, though with tighter underwriting procedures.
As long as law makers keep making decisions that safeguard the economy, I believe availability of credit will keep improving.
Simon from real estate investing | Jul 30, 2011 | Reply
Working in the real estate industry, credit is also problem. I think it’s great that we’re now ensuring that people will be able to pay their loans. Although the regulations are so tight at times it makes it hard to find a viable customer. All in due time, I’m sure we’ll find a happy medium.
Real Property Management Nampa | Oct 27, 2011 | Reply