Top Fed Officials Split on Cause Of Lending Drop
Does the decline in commercial lending represent a credit crunch - that is, the unwillingness or inability of banks to lend? Or does it stem from a lack of demand from borrowers?
That debate has simmered for months as economists and politicians have tried to pin the blame on the banking industry for a slow-growing economy.
Fed Chairman Alan Greenspan, for one, has clearly come down on the credit-crunch side of the argument. But, it turns out, that's not the unanimous view at the upper echelons of the Federal Reserve System.
"I don't think it's a credit crunch," Roger Guffey, president of the Federal Reserve Bank of Kansas City, said in an interview last week. "That doesn't tell the full story."
Meanwhile, his counterpart in Chicago, Silas Keehn, recently told Congress that "we are not experiencing a |crunch.'"
|A Northeastern Phenomenon'
Richard Syron, president of the Boston Fed, calls it a "capital crunch," and he says it is "not trivial."
"But I don't think it's an enormous factor in the overall economy," he said in an interview. "It's substantially more of a northeastern phenomenon."
The comments of the Fed officials suggest that any difficulties on the lender side of the equation - as opposed to with borrowers - might be a higher priority for Mr. Greenspan than for some of his colleagues.
The Fed chairman has promised to "break the back" of the crunch. Just last Thursday, he reiterated that the United States is still "confronted with significant elements of the credit crunch."
Great Effort, Little Headway
Mr. Greenspan's remarked that the Fed's board of governors is spending a significant amount of time addressing the issue. The Fed has cut interest rates and lowered reserve requirements in efforts to jump-start lending. The central bank and other regulators have also touted accounting changes and other moves to make credit more available.
But there's been little success. Commercial lending continues to slow: As of the end of May, total loans at all commercial banks rose just 2.2%, the slowest rate since April 1976.
The dropoff in credit has proved to be an economic conundrum that the Fed is finding devilishly difficult to solve or control. Yet with fiscal policy in paralysis, the Fed is the only effective policymaker in town.
"Traditionally monetary policy is just one of the actors," said Mr. Guffey. "The debate is whether monetary policy can do it alone."
A Familiar Pattern
Those who question the credit-crunch argument point to the consistent pattern in recessions of reduced lending and increased holding of securities, as banks reliquify their balance sheets in the wake of slack demand. Economists at Northern Trust Co. note that after the recession of 1975, commercial loans outstanding did not pick up until the third quarter of 1976 - a full 18 months after the trough of the recession.
"What's going on doesn't appear to be unusual, and is consistent with what we know about business cycles," said Jack Tatum, an aide to Federal Reserve Bank president Thomas Melzer.
In 1990, the decline in commercial lending as a share of Gross National Product mirrors almost exactly the decline in inventories relative to GNP, Mr. Tatum noted. Inventories were trimmed as businesses perceived falling demand. That led to a pullback in borrowing.
Fed's Grip Loosened
"Suggesting that there's no credit available is not the full story," said Mr. Guffey. "A crunch is one in which there's no liquidity to provide."
The question some are asking now is: If there's been no reaction, is monetary policy ineffective in battling the credit decline?
Mr. Syron points to the frayed relationship between the money supply and the real economy as evidence that the Fed's tools have been blunted.
"I don't think it's made monetary policy ineffective," said Mr. Syron. "But it has loosened the steering mechanism. If the steering gear is not as tight, it doesn't mean you can't turn the wheels."
Whether the Fed is hamstrung or not, the issue of the credit crunch has become de riguer. But Mr. Guffey suggested that there might be regional biases that have made this credit decline front-page news.
The Kansas Fed president noted that the energy and farm banking crisis of the mid-1980s didn't receive the same attention from policymakers and the press.
"We didn't get much sympathy," he said. "It was severe here, but few people in Boston knew or cared.