The Credit Crunch – a Supply or Demand Problem?
Over the last few months we’ve seen a drastic increase in bank reserves. As I’ve pointed out on previous occasions, banks are soaking up the liquidity provided by the Fed’s various programs and the credit crunch continues. But what’s the reason? Is it that banks are unwilling to lend in the current environment, trying to cap their losses? JPMorgan recently argued that it’s not the supply of credit that has collapsed, but the demand for it – consumers are hunkering down and have lost their appetite for spending; businesses that suffer from weak demand don’t require as much credit as they do in prosperous times; and hedge funds have grown weary of leverage. It’s a bit of a chicken and egg problem, but what do you think: is the credit crunch driven by the lack of supply or the lack of demand?
The money multiplier is money stock M2 (money & close substitutes for money) over monetary base M0.