No Credit Crunch

Gene Epstein writes in the March 1, 2010 issue of Barron's:

All we have are figures on the stock of consumer and business debt, from which inferences about a credit crunch have been drawn. But while credit-crunchists cite no direct data on new credit extensions, economist and statistician Jason Benderly of Benderly Economics has been able to approximate the various flows in a way that works surprisingly well. His findings are plausible and straightforward.

The Stock of Credit and the Credit-Crunch Fallacy

The Exponential Function

I am still pondering my way through the ramifications of the "Phoenix" paradox. If it is really true that GDP growth correlates to the rate of change of the change in loans outstanding, what Biggs, Mayer et al call the "impulse" and what I would call dSuck/dt, then it may be interesting to keep in mind that the derivative of the exponential function is.... the exponential function.

Also, it would seem that if this is what is really required for GDP growth, we're seriously screwed. Why would that be? Read this post from Fickett GDP growth is compatible with shrinking credit and then try to imagine a world where we can keep on growing without blowing up.

Money Heaven

Most of the flows in and out of the real economy do not create or destroy money. That only happens at banks (including the Fed).

So if we start from the premise that anybody who wants a loan and is creditworthy can get one (which is why interest rates remain low out past the rates set by the Fed), we aren't really concerned with on-lending from people who are sitting on a pile of money and wondering what to do with it.

We are concerned only about net lending by banks. Paul Kasriel at Northern Trust has an Econtrarian article about how to figure this out: Declining Bank Loans - Write-Downs or Pay-Downs?

Kasriel uses an idea provided by Jim Fickett at Clear on Money Fickett has several posts on the subject of net change in loans, and references an article written by Michael Biggs et al at Deutsche Bank: The myth of the “Phoenix Miracle”

They show a very close correlation between the net change in loans and GDP (both are flows). Loans don't have to grow for GDP to grow, they can just start shrinking more slowly. In other words, it's the rate of change, not the absolute value.

Loans Due to New Home Sales

This data was pulled from reports available at the U.S. Census Bureau site:

New Home Sales Reports

Quarter	Thousands Sold	Average Price	New Loans - Billions
2005Q1	328	$288,500	$95
2005Q2	351	$287,800	$101
2005Q3	326	$294,600	$96
2005Q4	277	$294,200	$81
2006Q1	285	$305,300	$87
2006Q2	300	$302,600	$91
2006Q3	250	$308,100	$77
2006Q4	216	$299,600	$65
2007Q1	213	$322,100	$69
2007Q2	235	$310,100	$73
2007Q3	181	$301,200	$55
2007Q4	146	$305,800	$45
2008Q1	141	$290,400	$41
2008Q2	143	$304,200	$44
2008Q3	116	$285,100	$33
2008Q4	85	$276,600	$24
2009Q1	84	$257,000	$22
2009Q2	104	$273,400	$28
2009Q3	104	$274,100	$29
2009Q4	83	$272,900	$23
2010Q1	87	$276,700	$24

Gee, all I need to do is find an extra $175 billion or so per quarter to get to even. I'll start looking under rocks bright and early tomorrow.

The Elephant in the Room

Outstanding mortgages cause a huge part of the cash flow out of the real economy. Here's a link to total mortgages outstanding:

FRB: Mortgages Outstanding

The balance as of the end of 2009 was $14.3 trillion. This includes both residential and commercial mortgages.  If we guess at 6% P&I on that amount, we have an outflow of over $200 billion per quarter.

A Partial List of Flows

I am starting to add up the flows in and out of the "real economy", which is represented by the line between consumers and enterprises in my diagram of suckage.

Out -> Principal and interest payments on:

Home mortgages
Home equity lines of credit
Revolving consumer debt
Non-revolving consumer debt
Commerical mortgages
Corporate bonds
C&I loans

In <- New borrowing

New home loans (but not existing, because that typically just swaps one loan for another)
Mortgage equity withdrawal
Credit card balance increases
New non-revolving loans
New commercial loans
New bond offerings
C&I balance increases