Financial Fuss (2) - Credit Squeeze

There is now less credit available. Americans have been poor savers for a long time and have relied on people in other nations to make up the short fall. I suspect that foreigners are now not so keen on that role. Worse still, some of the money that used to be available for lending has been wiped out by “write downs” and losses by various banks. The collapse of leverage has also reduced the amount of credit available.

In a normal world, declining availability of credit would not be a problem. Interest rates would rise to ration the available credit to the most efficient users. However, the Fed is holding interest rates down at a level where demand exceeds supply. This makes it seem like there is a shortage.

When supply declines, some of those who would previously have received credit miss out. Marginal businesses will find credit more difficult to obtain. Homebuyers with only a small deposit will find a mortgage more difficult to obtain. This happens as banks become more careful about allocating credit. However, credit is still available for good businesses. Statistics show that commercial and industrial loans by commercial banks are still at very high levels.