Everyone is talking about how credit has “dried up”. So, has it dried up? Not really.
Source: Federal Reserve of St. Louis
As the data shows, bank credit has come down slightly but nothing like what the media hype would suggest.
Even consumer credit is holding its ground…
Source: Federal Reserve of St. Louis
Consumer credit has remained stable, just no growth.
Why? The U.S. economy seems to have reached a cap in the amount of debt it can sustain. Additionally, Americans had a sizable amount of their wealth destroyed in this crisis (lower home prices, stock market crash, derivatives market crash, etc), which has decreased the overall equity in the economy.
Therefore, with lots of debt and less equity, it’s hard to increase debt levels.
Source: Option Armageddon
Source: Option Armageddon
Summary
In sum, we can see that there is still about the same amount of credit in the system and that the real factor has been the stop in credit growth. Companies and consumers have become used to an exponential credit line which is not sustainable and thus have to re-adjust their spending.
When you see people saying that we need to get out of this crisis through more credit and debt, the question becomes whether we can really accumulate more debt (especially given that our overall equity has decreased).
Switching gears
Why are banks not lending?
Consumers have been losing their jobs and are already over-levered. Additionally, delinquency rates have gone up across the board in most loans.
Here are two graphs showing higher delinquencies:
Source: Federal Reserve of St. Louis
Source: Federal Reserve of St. Louis
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