Credit where it counts? | FT Alphaville

Credit where it counts?

*Poof* That is the sound of US bank credit evaporating.

Or maybe, a giant *Pop* would be more apt given the credit frenzy pre-2007.

Gluskin Scheff’s David Rosenberg estimated in February that $740bn of bank credit had evaporated since the credit crisis began. That’s despite quantitative easing and a myriad of liquidity operations undertaken by the Federal Reserve to help stimulate bank lending.

You can see the credit contraction in the below chart, sourced from the Fed, and sent in courtesy of Sean Corrigan of Diapason Commodities:

Of course, credit contraction is not necessarily a bad thing, in fact, many argue that it is exactly what the American financial system needs — mass deleveraging.

As Corrigan puts it:

. . . the decline from the peak in October 2008 has effectively eradicated the rise seen in the previous fourteen months or so — loans which presumably represent the most malinvested — and hence wastefully uneconomic — of the sample. Removing this sort of excess is precisely what the process of recovery must entail . . .

But if banks aren’t lending, they still need to do something with their funds. Parking it all in cash is of course, one option. Rosenberg said in February that banks hold about $1,250bn in cash.

But there is something else they’re doing:

So that would be less private lending, and more to the US government.

Related links:
On those ‘epic’ declines in bank lending – FT Alphaville
The FSA says now is not the time for (bank) bondage – FT Alphaville
Bailout banks buying Treasuries help keep rates low – Bloomberg