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Monday, May 04, 2009


loan demand still down

following on last quarter's release, via clusterstock the new fed survey of senior loan officers shows that things simply aren't improving all that much on the demand side of the retail credit market. residential mortgage demand has improved, but the vast bulk of this activity is linked to refinancing and not new credit. C&I and CRE are at new lows of demand.

lots of folks are concentrating on the supply side -- note the headline at calculated risk, which is representative of all the ledes i've seen -- and perhaps that's natural given the massive public support being put under the banks. but credit supply isn't the primary problem facing our society going forward.

paul krugman a few days ago touched on this fact in recasting the current situation.

In effect, we have an incipient excess supply of savings even at a zero interest rate. And that’s our problem.

So what does government borrowing do? It gives some of those excess savings a place to go — and in the process expands overall demand, and hence GDP. It does NOT crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap.

Now, there are real problems with large-scale government borrowing — mainly, the effect on the government debt burden. I don’t want to minimize those problems; some countries, such as Ireland, are being forced into fiscal contraction even in the face of severe recession. But the fact remains that our current problem is, in effect, a problem of excess worldwide savings, looking for someplace to go.

with loan demand a victim of private sector balance sheet repair for the forseeable future, government is the only borrower in a position to dredge those excess savings out of the banks and circulate them in order to support money supply, incomes and deposits.

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