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Is Obama Wrong About A Credit Crunch?

President Obama on Friday offered a mildly upbeat forecast about the prospects of the United States, saying he saw "glimmers of hope."

One reason, Mr. Obama said, was that "we feel very good about the progress that we're making in unlocking lending in particular markets," and mentioned small businesses as an example.

In truth, banks lend money to individuals and businesses only when they believe they're going to make money. And there may not be that much the government can (or should) do to change that.

If Americans are falling behind on credit cards, as they are, it should be no surprise that lending standards are tightening. People with histories of not paying their bills may be cut off entirely.

Plus, as our colleagues at CBS Evening News reported last fall, investors have been spooked by the the dangers of slicing up loans and selling them off in chunks and have lost much of their appetite for auto loans, credit card purchases, and student loans that are carved up that way. (The process is called securitization, and arguably helped the housing bubble grow to the size it did.)

These adjustments are normal and necessary. During a credit bubble, lending standards tend to decay (or, in the case of residential real estate, seem to have vanished completely). When the bubble bursts, they reappear. Trying to stop this runs the risk of confusing bubble conditions with normal ones.

There's another problem with Mr. Obama's suggestion that bank lending can be "unlocked" if his administration can find the right key. The problem is that, although credit standards have surely tightened, loans are still readily available by any reasonable historic standards.

Consumer credit outstanding remains at $2.6 trillion as of February 2009, according to Federal Reserve data released this week, up from $2.3 trillion in 2005 and higher than it was even early last year. Even if part of this is people drawing down lines of credit, it still doesn't depict an economy with credit markets that are "locked up."

A report published in December by Celent, a financial services consultancy, tries to explain this apparent discrepancy.

Celent notes that household credit is very close to its all-time high, that short-term credit has become cheaper in the last year thanks to lower interest rates, and that bank lending is at or close to a record high.

The report says: "The juxtaposition of policymakers' statements regarding the state of the credit market are both puzzling and troubling. A variety of fundamental assertions about the state of the credit industry in the U.S. are not supported, and in many cases flatly contradicted, by the available data. In most cases, these very data are being published by the organizations led by the policymakers in question."

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