What credit crisis? There never was one, claims report

Many of the fundamental assumptions regarding the nature of the credit crunch spawned by the current financial crisis are quite simply not supported by or contradict the government's own facts and figures. As a result, the policies being employed by the government to deal with the crisis may also well be the wrong ones, according to a soon-to-be-released report from Celent, an IT research and consulting firm that specializes in the financial services industry.

The report is written by Octavio Marenzi, the company's CEO. It basically compares comments made by policy makers to justify the massive government intervention in financial markets, with publicly available data mostly from the feds themselves.

What it shows is startling if Marenzi's analysis is correct. Contrary to what most people might believe, banks did not stop and have not stopped lending money to other banks, businesses or to consumers. Neither has there been a particularly serious freezing up of other sources of funding such as commercial paper and corporate bonds.  It is this sort of a purported broad credit crisis that triggered the massive policy interventions by the government.

In fact quite the opposite is true. A look at the Federal Reserve Bank's estimates of bank lending from 1978 through October 2008 shows that lending has remained "unperturbed" by the financial crisis and in fact has been growing steadily over the years, the report said. From April 2007 to October this year overall bank lending increased by over 16% with even the failures of giants such as Bear Stearns, Lehman and AIG not having any perceptible impact on overall lending.

Marenzi's conclusions echo those in a report ( "http://www.minneapolisfed.org/research/WP/WP666.pdf") published in October 2008 by the Federal Reserve Bank of Minneapolis that also used federal data to show that many of the government's assumptions about the credit crunch were plain incorrect.

According to Marenzi, inter-bank lending in fact increased by 60% from mid-2006 and hit an all-time high this September even as the cost of banks borrowing from one another decreased. The same trend applied in the case of commercial and industrial loans, which also hit a peak this October and has a current annual growth rate of 19%. The numbers would appear to contradict claims that there is a severe ongoing funding crisis for businesses.

The diminished access to credit across the board that was expounded by policy makers to justify the massive government intervention in the financial markets is not evident in the case of consumer credit either, according to Marenzi. In the aggregate, U.S households with good credit have had continued availability to financing. The availability of credit for mortgages and other real-estate related loans also did not quite freeze up as many might have assumed. In fact, real-estate lending by U.S. banks was at an all-time high this October, the Celent report said citing numbers from the Federal Reserve. While there may be a reduction in the demand for mortgages, there is no reduction in their availability.

It is not just bank lending that appears to have done better than thought but also other sources of funding such as corporate bonds and commercial paper.

There might be a couple of reasons for such apparently "irreconcilable differences" between the government's assumptions and the reality on the ground, Marenzi said. One is that policymakers have access to far more data than has been publicly disclosed. It is possible that such data supported their hypothesis of a crippling credit crisis. Another possible explanation is that the government just looked at a few troubled companies and started making generalized assumptions about the rest of the market from them. Or just maybe, they didn't do their homework?