ON-Lion Letter
"Credit creation continues to lag the levels necessary to support economic growth," according to a July editorial by the staff of e21, a center of the Manhattan Institute for Policy Research in New York City.  "In the first quarter of 2011, the total amount of credit market borrowing in the United States was $912 billion (annualized), or about 6% of GDP.  Of that total, the Federal Reserve supplied $995.3 billion," on net.  The Fed, in other words, supplied 109% of all lending in the U.S. economy in the first quarter.

"Since 1980, credit growth (as a percent of GDP) has been positively correlated with nominal GDP growth," the e21 staff continues.  The lending excesses of 2005-07, however, "have made credit less available for high-quality borrowers today by increasing the regulatory scrutiny applied to prospective loans. ...  [I]t seems clear that part of the problem stems from regulators seeking to overcompensate for past failings by creating what local bankers describe as an 'oppressive examination environment.'"

"The economy is too weak to withstand this level of regulatory micromanagement," e21 concludes.  "Regulators do not have enough information to make decisions about each loan in the portfolio so they necessarily generalize in ways that disadvantage high quality borrowers in troubled sectors.  This limits growth.  Worse, the discourse in Washington tends to focus on whether slow loan growth is attributable to 'supply' or 'demand,' as though all borrowers' credit histories, business plans, and capital structures can be easily aggregated into a demand curve that could be interpreted on the national level.

"In a decentralized, capitalist economy, lending decisions must necessarily be made at the local level by bankers willing to risk their own capital to fund projects in the pursuit of profit.  Regulations that inhibit this localized process retard economic recovery and make the economy more dependent on the Fed to supply credit and the Federal government stimulus to provide incremental demand."

The Lynde and Harry Bradley Foundation in Milwaukee substantially supports the Manhattan Institute.
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