The question that economist Alex Tabarrok is implicitly asking in his post on the financial crisis is the same one I’ve been flogging here for some time, whether a crisis in the financial sector will actually translate into a crisis with the general economy:
As Robert Higgs points out consumer loans are up, commercial and industrial loans are up, even real estate loans are up. Overall, total bank credit is up with just a slight sign of leveling off in recent weeks. So where is the credit crunch?
A credit crunch does exist in the sector of the market based on short-term, asset backed securities. In addition, interbank lending is unusually risky. But in light of what I have just said the “credit crunch” takes on a new meaning and potential new solutions are suggested. The first question I have is this. Investment banks were selling these securities and using the money to lend to whom? I do not know the answer. But let’s suppose that the money being raised in these markets was being lent to productive businesses. If so, then any solution should focus on feeding those businesses that are starved for credit.
That’s a good start on the connecting the dots process I’ve been asking for. What otherwise credit-worthy business are unable to get loans? Is their number likely to rise sharply soon?
Update
From PD Shaw in the comments the Financial Times notes that Caterpillar had some difficulty in raising funds:
The financial arm of Caterpillar on Tuesday raised $1.3bn in the first large corporate bond sale since the credit markets froze last week.
Corporate financing was expected to pick up in September, but new issuance vanished as liquidity dried up with the bankruptcy of Lehman Brothers, the near-collapse of insurer AIG and concern about the future of Morgan Stanley and Goldman Sachs.
The sale is a step toward reopening the market, but Caterpillar had to offer high yields to raise funding. While capital may be available again, it is expensive, even for healthy companies.
“It says that companies with reasonably successful businesses can still access capital at a price,†said Jason Brady, a portfolio manager at Thornburg Investment Management.
Is that another dot or connecting dots? Not a crash but not particularly good news for growth, either. And, as one of Megan McArdle’s readers notes, when industrials have this sort of difficulty it doesn’t bode particularly well for large firms in the troubled financial sector.
Note that from the Megan McCardle blog, Caterpillar is having trouble raising capitol in the first large corporate bond sale since the crisis. From the Financial Times: “The sale is a step toward reopening the market, but Caterpillar had to offer high yields to raise funding. While capital may be available again, it is expensive, even for healthy companies.”
Dave,
My brother owns a small construction company (about a dozen employees) and has difficulty getting credit since early this spring. Because of the nature of the construction business, short-term loans at the beginning of a job are often essential.