John Carney of Clusterstock
One of the most confusing debates through the credit crisis and bailout has been about whether or not bank lending had seriously contracted. Politicians and many pundits argued that banks, even after being bailed out by the federal government, were hoarding cash and refusing to extend credit to companies and individuals. Many bank heads argued that the real credit crunch had nothing to do with bank lending and was really all about the securitization market.

So what’s really going on?

James Kwak at Baseline Scenario points out that charts showing overall outstanding loans are misleading because they don’t tell us what banks are doing now. And the charts, like the one below, that show the flow of funds from banks to borrowers show a sharp contraction from the first quarter of 2008. (Except in the last quarter of 2008, which we’ll get to shortly.)

Astute readers will notice a huge spike in the third quarter of 2008. This might look like banks suddenly started lending out lots of money at the very time the credit crisis was thought to be at its worst. If that sets off your B.S. radar, congratulations. You are still a thinking human being. Continue Reading