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In nearly every article and news story on the latest financial crisis we hear that financial markets are suffering from a “credit crunch.” It would be useful to understand what this term means. A credit crunch describes a situation where the availability of credit (e.g. loans) from financial institutions declines rapidly and substantially. Restrictions on credit can arise from monetary tightening by the central bank, government imposed credit controls, or by changing risk perceptions in the financial sector. Only the latter can accurately describe the current banking situation. Since many financial institutions own (directly or indirectly) large pools of securities containing bundles of mortgage instruments, and the real value of these instruments remains a mystery, lenders have an increased sensitivity to the risk of insolvency of potential borrowers. Their sensitivity is particularly acute because many financial institutions holding these instruments have used leverage to purchase them – which magnifies their exposure on both the upside and the downside.
But are banks actually limiting the availability of credit? The aggressive and unusual actions by the Fed since last August seem to indicate this is the case. Arrangements for banks to access liquidity include actions by the Fed to lower the discount rate; allow investment banks to access the discount window; set up a $200 billion credit swap facility; and substantially ease the federal funds rate. But data on actual lending by banks demonstrates that credit is available, and in record amounts. The chart below shows that in real terms the level of commercial and industrial loans outstanding at all commercial banks hit an all-time high in February. Weekly data for a survey of large commercial banks suggests this trend is continuing into March. 
In fact, every conventional measure of loans outstanding demonstrates a similar trend, including real estate loans at commercial banks, with the slight exception that individual loans at all commercial banks were flat in January (at an all time high level). Even the size of the domestic financial commercial paper market, while tailing off since October, remains at levels exceeding August – when the current crisis seems to have accelerated. If there is in fact a credit crunch (standards for all real estate loans appear to be getting stricter) it does not appear to have spread outside the housing sector, if even within the housing sector. Commercial lending is at an historic high. The current crisis is not making it more difficult for entrepreneurs to access commercial loans to finance their business plans. The crisis, whatever name one chooses to give it, seems to be something altogether different. * Note to readers of our Research Reports. We do not present the data here for AIER’s lagging indicator, commercial and industrial loans outstanding, because it is a sum of loans outstanding from large domestic commercial banks plus commercial paper issued by non-financial companies. But credit is still widely accessible among nonfinancial companies as well. The value of commercial paper outstanding in that sector (though well off its expansionary peak) is higher today than at the start of the credit crisis in August.
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