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The Ongoing Credit Crunch

Paul Solman: Conservative economist Ed Yardeni, whom I cited earlier this week, wrote Thursday morning about an issue that we address on the NewsHour soon: the continued “credit crunch” — unavailability of bank loans — in our supposedly recovering economy.

Our story is one we stumbled on in Springfield, Missouri, recently while profiling the remarkable Rust Belt success story, SRC (Springfield Remanufacturing), in a piece we referred to as Small Enough to Succeed. Despite its accomplishments, it turned out that SRC and its corporate progeny couldn’t get bank loans unless they had the equivalent amount of money already on deposit at the bank. Talk about getting a loan only if you don’t need one!

Yardeni mentioned “alarmist Ambrose Evans-Pritchard” in the London Telegraph and an article published yesterday: US money supply plunges at 1930s pace as Obama eyes fresh stimulus. Evans-Pritchard is “a very smart and influential fellow” whose articles “tend to focus on the Dark Side. His latest is particularly bleak…. He writes that M3 [the broadest measure of the U.S. money supply] plunged 9.6 percent from $14.2tn to $13.9tn in the three months ending in April…He quotes Professor Tim Congdon from International Monetary Research, who must be the source of the data, as follows: “It’s frightening. The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly.”

In other words, banks are making fewer and fewer loans, meaning there’s less and less money in circulation. Yardeni doubts it. Our SRC experience, by contrast, lends some small support to the fear.

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