(March 28, 2008) – I have written lately that the reason the banking crisis has not killed GDP and jobs–at least not yet–is that the infarction has not spread to business lending. More than 50% of GDP is produced by small, private companies that have no access to the public markets. They get the working capital they use to buy raw materials, make payroll and tread water until their customers pay from banks and private equity firms. As you can see in the latest data in the chart below, so far so good. Bank Commercial and Industrial Loans
You can also see, however, by clicking on the link below that the big banks pretty much pooped out last fall; most of the burden since then has fallen on the shoulders of small and medium-sized commercial banks.
This is the reason I have been so critical of the Fed’s heroic lending arrangements to keep the big brokers, investment banks and banks liquid. Providing adequate liquidity is a great idea, but the Fed has combined these new credit lines with sterilization measures that keep total bank reserves and the monetary base from growing when the big firms tap the credit lines. That means the Fed is sucking one dollar of reserves out of small and regional banks for every dollar it makes available to JPMorgan or Goldman Sachs. That is very destructive to the business lending we need to keep the real economy afloat.
JR
