East Coast Economics

The Credit Crunch – a Supply or Demand Problem?

with 3 comments

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?

0901-money-multiplier1The money multiplier is money stock M2 (money & close substitutes for money) over monetary base M0.


Written by eastcoasteconomics

March 11, 2009 at 5:18 pm

3 Responses

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  1. Bullcrap what banks are saying – it’s supply. They are holding liquidity. Investor confidence is an issue, but lending with such high interest rates is not helping.

    I can only judge by intl student b-school loans. Some loans are libor+ 7/8% . Whaaat?


    March 12, 2009 at 11:21 am

  2. By the way, on an unrelated topic – if the dollar devalues (which it will), what’s the safe haven currency?

    Given that there are some many investors out there right now, taking refuge in $ cash. Where should they be going?


    March 12, 2009 at 11:22 am

  3. The key to understanding this and many other simalar topics is found in the definition of the word “demand”. Demand is not just the willingness of the consumer to spend or -barrow in this case-, it is also dependent upon his ability to barrow or spend. By modifying credit standards and interest rates the banks control who is qualified, ie. “able” to barrow. This directly manipulates demand, and therefor can allow the banking industry avoid the possible negative association with supply manipulation.

    zack sheidler

    March 13, 2009 at 8:41 am

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