Commentary

Bank Loans Have Not ‘Dried Up’

The frantic congressional push to “do something” about mortgage-backed bank investments has been widely defended with equally frantic claims that U.S. bank lending to business and consumers has been shrinking fast.

On Sept. 24, Congressional Budget Office Director Peter Orszag warned Congress that “short-term lending was virtually shut down.” The following day, The Washington Post reported that “tightening [bank] credit conditions are already affecting some consumers and business.” Just before the $700 billion deal was announced on Sunday, an alarmed Fox News anchor said, “McDonald’s can’t even get a loan.” (That comment confused a few franchise owners with the company.)

On CNBC Monday, Democrat majority leader Steny Hoyer said the objective of the rescue package is to “unlock the credit” for consumers and business. And a Wall Street Journal editorial writer told CNBC, “Until we get the banks lending again, the economy will continue to contract.”

Such alarming comments never mention any facts. Why not? As Neil Cavuto recently noted on Fox Business News, the Fed reports bank loans every week.

Table One
U.S. Bank Loans (Billions of Dollars)

Zimbabwe: The Hanke Hyperinflation Index

Federal Reserve Board, Asset and Liabilities of Commercial Banks in the United States (H.8).

In August, bank loans to consumers were 9.5% higher than they were a year earlier—the fastest increase since 2004. The year-to-year increase in consumer and industrial loans was 15.5%, down only slightly from a recent record high of 21.6% in March. Real estate loans were up 4.1% for the 12-month period ending this August—flat lately, but not down.

Did bank lending suddenly turn south since August? The latest data is for the week ending Sept.17, when the U.S. expropriated 80% of AIG (nyse: AIG - news - people ) equity and thus tanked most financial stocks. U.S. bank credit hit a record of over $7 trillion in the latest week—up from $6.57 trillion a year earlier and $6.92 trillion at the end of July.

Contrary to many comments, consumer and industrial loans actually increased in the latest week. Troubled giant banks have cut back on lending, but smaller banks have picked up the slack. Consumer and real estate loans dipped insignificantly through Sept. 17, remaining much higher than they were a year earlier.

If all the recent hysterical chatter about lending being “frozen” or “shut down” refers to anything real, it is not about banks loans (through Sept. 17) but about such arcane financial markets as asset-backed commercial paper or loans between banks. But this too is mainly about financial firms, not Main Street. Non-financial commercial paper increased from $156 billion at the start of the year to more than $204 billion from Sept. 3 to Sept. 17, dipping only modestly since then.

Economic journalists seem oddly fascinated with the last column of the table—interbank loans from one to another (aside from fed funds). “Banks won’t even lend to each other,” said a TV reporter, “so how can we expect them to loan to business or consumers?” But interbank loans are obviously tiny, and banks rightly regard lending to other banks more risky than lending to Main Street. There is no reason to expect the minuscule flow of interbank loans to determine consumer and business loans. That little tail can’t wag the big dog.

The interest rate on interbank loans, the three-month London Interbank Lending Rate (LIBOR) rate, was a shade over 4% on Sept. 30, which inspired some scary talk on CNBC that morning. But a 3.9% LIBOR rate in January did not inspire such worries, nor did a 5.5% rate last September.

There has also been much hand-wringing about the wide “TED spread” between the very low interest rates on Eurodollars and the extremely low interest rates on three-month U.S. Treasury bills. But the TED spread does not predict recession—it flashed false alarms in September 1987 and December 1994 and provided no warning of the 2001 recession.

Everyone knows that U.S. banks have virtually stopped lending, deeply slashing their loans to U.S. consumers and firms. As is so often the case, however, what everyone knows is probably not true.

Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth.