WASHINGTON -- It seems that the credit crunch, once a hot topic of discussion by business and the subject of numerous congressional hearings, has disappeared from the public docket.
At the Federal Reserve, the debate over why banks are not lending much has been settled. "What's happened is that there has been a far more conservative lending procedure on the part of loan officers, most of which I think is justified," Alan Greenspan said in response to a question from Senate Banking Committee Chairman Donald Riegle.
This frank admission from the Fed chairman during his Humphrey-Hawkins testimony on July 21 put him squarely on the side of bankers who have been arguing that they would like to make more loans, if only they could find creditworthy customers.
That is not what members of Congress say they have been hearing from constituents whose businesses were unable to get credit or, in some cases, renew credit. Mr. Greenspan's response made clear he was not buying the idea, although he did add, "there are some creditworthy people out there who are not getting loans."
Mr. Greenspan has also not been sympathetic to complaints that banks have been loading up on Treasury securities instead of making loans to customers. American Banker reported last week that for the first time in 27 years, banks held more government securities than business loans. The article, citing data from the Fed, says commercial and industrial loans extended by banks at the end of June totaled $598.5 billion, while government securities holdings totaled $607.3 billion.
There is a reason for the shift. Banks are not required to set aside much capital against government bonds, while they must set aside 8% against business loans. Apart from the regulatory incentives, banks have been acting like small-time investors and getting out of low-yielding money market instruments into bonds.
With lower rates, banks have been enjoying a lower cost of funds while they pay less to depositors and enlarge their margins on loans. Yes, Mr. Greenspan conceded in testimony last week before the House Banking Committee, "interest margins have widened in the commercial banking industry and been a function of increased profitability."
The message from the Fed is simple. Banks may not be lending, but that's all right because they can't do business with the same old crowd of customers. Banks may be increasing their bond holdings instead of lending, but that's all right because they have to stay profitable and improve their balance sheets.
The bottom line for the Fed is that Mr. Greenspan and his colleagues, above all else, want to ensure a healthy banking industry and are pleased to see things turning around for their regulated friends. Even the profits of the savings and loan industry are up.
That's all fine. A central banker's worst nightmare is a weakkneed financial network that is unable to supply credit. And the savings and loan bailout is a bitter lesson for everybody that sick financial institutions can cost U.S. taxpayers heavily.
But there is still a question about how committed the Federal Reserve is to supplying liquidity to the economy, which is the job of monetary policy, when there might be a conflict with the needs of the bankers.
Sen. Riegle raised the issue when Mr. Greenspan testified before the Banking committee. "I can see why you might be torn sometimes between actions that would help the banks and actions that they might take on their own behalf as they restore their tattered balance sheets, versus a more aggressive push to get credit through the system to worthy borrowers to try to finance more of a lift in the economy generally," the Michigan Democrat said.
Indeed.
