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Credit is not the problem in the crisis
Visa credit card in wallet
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TEXT OF INTERVIEW
Scott Jagow: You ready for this? A new report says there is no credit crunch. There's a financial crisis, obviously, but access to credit is not the problem, even though the Treasury and the Fed have said it is a problem. This report comes from the financial services consultant Celent. And we're joined now by the head of the firm, Octavio Marenzi. Octavio, this is kind of surprising. What are you basing this on?
Octavio Marenzi: Mostly from the Federal Reserve itself. So the vast majority of the numbers that we used in this report actually come from the Federal Reserve, and in area after area what we found is that really, a lot of the lending, a lot of the things being said about the credit crisis or the nature of the financial crisis aren't born out by those numbers. So we found that bank lending is at a record high, consumer credit is at a record high, inter-bank lending is at a record high. All these things that we've been told have basically dried up are actually flowing quite well.
Jagow: So are you saying that a few bad apples among the banks are causing, have caused all of this uproar about credit?
Marenzi: I would say that's probably what's happening, that a few very large institutions are in financial difficulty, they're having a hard time obtaining credit. And if you look at the panel of banks on the LIBOR rate, more than half of them I would put in that category. Now, there are a lot of banks out there who didn't make bad bets, who didn't get very involved in the subprime markets, and they're doing quite OK -- and they have no shortage of credit for those kinds of institutions.
Jagow: Are you that the Treasury Secretary and the Fed Chairman are A. misinformed or B. not telling the truth?
Marenzi: I'm not saying either -- I don't want to accuse them of not telling the truth. I think they're analyzing the situation and coming to conclusions about it, but I don't see where that information is coming from. And even economists within the Federal Reserve aren't seeing where they're coming to these conclusions either.
Jagow: OK, then the bottom line is if it's not access to credit which is causing this financial mess, what is?
Marenzi: Well, what's causing the financial mess is that a number of institutions took very, very large risks -- in hindsight, very poor risks -- and got caught. So they lent to the wrong people, they lowered their lending standards, and they lost lots of money as a result of it. But I would point out it's not all banks that did that, there's a large number of banks that did not do that. But unfortunately, amongst the top banks in the country, there's a fair number who got caught in that trap.
Jagow: Well, certainly eye-opening information. Octavio Marenzi from Celent. Thanks for joining us.
Marenzi: Thank you very much.
This story is right on target. I have been blogging since this whole mess began at http://mast-economy.blogspot.com.
The reality is that we are now victims of a bunch of "created" bad news on the back of some high profile mistakes.
On the flip side, a bunch of good news is out there in the past 2 months...
With oil prices way down, the US consumer is gaining significant savings at their local gas station. Since a peak in mid-summer, the price for a gallon of unleaded as fallen over $2. With the US consuming close to 390 million gallons a day, that savings translates to a $780 million dollar stimulus package for US citizens PER DAY with no congressional action required.
The business credit markets continue to thaw. LIBOR rates are way down and borrowing volumes are way up -- by orders of magnitude from what they were in early October. In a further indication of a world market economy on the mend -- large international banks like Chase and Citigroup are lending to their counterparts like HSBC Bank of Europe.
And the market for commercial paper — the unsecured debt that companies sell for short-term financing — continues to improve. In early Oct, even the strongest companies like AT&T were having trouble selling paper for longer than overnight. Now, investors are back in and buying paper from these businesses with 30-day and 60-day maturities or longer.
Surprisingly, consumer spending was up on both Black Friday and Cyber Monday.
And on 12/3, the Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended November 28 "soared a by a record 112.1%" I doubt they are sub-prime!
October was tough. A recession is here. But significant economic engineering on the global market scene has already produced some very positive results.
Marenzi must be talking about financial institution to financial institution lending. I believe lending to individuals and companies has dried up via much tighter standards. A friend of a friend who owns a small used car dealership, sold 20 cars but had 10 of the deals fall through due to the buyer not qualifying for the loan. He's been in the business over 15 years and said that these people would have qualified in the past. I wonder if the 30% drop in auto sales seen by GM and Toyota is due to this same issue.
Contrast this view with that of researchers at the Boston Branch of the Federal Reserve, which may be found at
http://www.bos.frb.org/bankinfo/qau/wp/2008/qau0805.htm
So, apparently opinions differ among branches of the Fed. Healthy debate sounds better to me than rushing to conclusions.
This is the kind of story that makes NPR invaluable -- there is much behind this incredible financial state of affairs that we don't know -- that is not reported for whatever reason. I agree the story needs a follow up and more attention.
Personally, as a business person in the real estate business, I can attest to the fact that institutions are definitely lending -- For the most part requirements to qualify are stiffer, but the money is there. There are even still A.R.M.'s available I'm told.
I find this report hard to grasp. I know it is difficult to do an indepth report give the length of the spot. But, my personal experience is that credit is tight, very tight. Two points of concern: 1.) what is included in Marenzi's numbers when he says that lending is at an all time high? If he is counting loans that the FEB and Treasury are making, then money is flying around wallstreet.. even the world .. covering MBS and CDS at an all time high. But the focus is at the base, that is where the money is actually working like average people trying to make a living ... then... I believe strongly and have personally experienced that the answer is NO. So, my base question is "What do his numbers measure?" And then 2.) He said there is credit for those who are credit worthy. My question is What is Credit worthy? If Credit worthy is you have to have a score above 700, then that's a large change in criteria and at the moment there are not a lot of people or business that meet that criteria.
I think his (Marenzi's) premise was not stated well. I think .. if he is right after checking out what really got measured.... then he has a case to say that Yes credit is really messed up bit time... but its messed up big time because there is a deeper underlying problem that being that financial stability of organizations and individuals is very questionable at the moment, and that is the real problem...
Even Ben and Hank freely admit that there is a lot of money available at the credit windows ... and institutions are not partaking of it...
so... hmmm... this piece needs a follow up.. There might be something there.... but somehow it did not come out. Difficult subject to deal with in a few minutes spot.
Thank you
James A Keddie
Small Business Person.
