Headline: Lending Falls at Epic Pace

In a front-page article published on February 24, 2010, under the byline of Michael Crittenden and Marshall Eckblad, the Wall Street Journal reports that bank lending, down 7.4 percent since last year, has fallen to its lowest level since 1942.

As I noted in my most recent post, the reluctance of banks to lend cannot plausibly be explained by a lack of liquidity, but instead can be traced to credit risk—lenders’ inability to parse the financial capacities of borrowers to repay loans, especially those of counterparties who have invested in mortgage-backed securities and other ventures promising similarly unsure future returns.

Recovery from the current financial “crisis” cannot begin until such uncertainty is resolved. That resolution depends, as Senior Fellow Robert Higgs has so well documented, on a return to predictable public policies with respect to taxes, spending and regulation.

Free markets are incredibly vibrant, but alert entrepreneurs must be able to plan for the future, even though those plans are subject to being upset by unanticipated changes in the conditions of supply and demand. Adding inconsistencies in public policy on top of that makes the discovery of market equilibrium prices and quantities all the more costly.

The Great Depression lasted until after the Second World War because of the anti-business rhetoric of President Franklin Roosevelt, which became more virulent after he was reelected to a second term in 1936. President Barack Obama should heed the lessons of the New Deal unless he is willing to sacrifice another term in office to the uncertainty fostered by vacillation in his left-leaning principles.