The Stealth Credit Crunch – Is It Live Or Is It Memorex?

The economic data released last week painted an picture that may best suited for the ice cream shop…a double dip. Atrocious employment, weak durable goods orders and falling new orders in the ISM index have us questioning whether the economic pain is really over.

This time last year, we were riveted to our computer and television screens wondering which company would be the next to need a bailout. The policy of too big to fail was in full swing.

This autumn we are faced with the foreboding task of deciphering the latest economic data to determine the next economic path. Our favorite leading economic indicator, the M1 multiplier, will be our light through this valley of darkness.

Over the last month, the M1 multiplier has continued to fall suggesting the economy is not expected to get any better. We wrote a month ago about the decline in the M1 multiplier and its implications for the economy. Recall that the M1 multiplier has correlated with the path of the economy 6 months ahead 96% of the time since the 1950’s.

Part of the reason for the decline in the M1 multiplier is M1 itself. M1 is falling suggesting the American public has less money to spend.

At the same time the monetary base is rising to record highs.

The cause of the rise in the monetary base is a dramatic rise in bank reserves.

The implication of higher reserve balances is that banks find it more profitable to hold money at the Federal Reserve than to lend it out. Of course this leaves the economy even more desperate for credit. The lack of credit is clearly hurting profits which normally would help boost M1, but as we have seen, M1 is declining, suggesting profits are declining.

Examining the amount of loans, leases and credit commercial banks are extending we find the number to be falling to the lowest levels all year.

Our concern is that the banks unwillingness to lend is creating a stealth credit crunch among small businesses. This credit crunch resembles the more visible crunch experienced by large corporations last fall. The difference is, small businesses are not too big to fail.

Disclosures: None

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Comment by Tamara Holmes

2009-10-27 02:56:49

Adverse credit mortgages are arranged for home owners and first-time-buyers with impaired credit files. People with adverse credit are usually excluded from applying for mainstream mortgage products and are therefore forced to seek alternatives.

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