From Rex Nutting at MarketWatch:
U.S. banks are reducing their lending at the fastest rate on record … According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace…
… if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks’ balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.
Banks have completely shirked their obligations under the TARP bailout and are refusing to lend more money to individuals and businesses. They have simply taken this money and deposited it with the Federal Reserve or invested it in equities markets for superior returns. Regardless, we see that credit is diminishing rapidly. Over the summer, consumer credit plummeted by over $40 billion and credit card spending fell by over $30 billion.
As more and more people lose their jobs, the pool of creditworthy borrowers is dwindling. Salaries are no longer increasing. The demand for credit is actually decreasing because fewer and fewer folks are in a position to borrow for investment projects. There is almost no internal growth in our economy right now.
Unemployment is rising and the pool of creditworthy borrowers is declining. When credit recedes in an economy where salaries have stagnated and joblessness is increasing, demand falls and recession deepens. That is, unless government spending takes up the slack in excess capacity. The so-called recovery is a result of fiscal stimulus and the Fed’s extraordinary liquidity injections into the financial system. True growth and prosperity do not come via the printing press. The Fed’s actions are just putting more and more pressure on the dollar.
The Federal Reserve seems committed to the idea of inflating our way out of this enormous debt. By drastically diminishing the value of the dollar, our actual debt can be managed… or so they seem to believe. Those holding dollar debts are at a huge disadvantage.
What should the average citizen do right now? It seems most prudent to go out and purchase things. Many people are rushing out to buy gold and silver as hedges against a plummeting dollar. Longer-term investors are actually going out and snapping up devalued real estate. While the credit crunch will suppress real estate values in the short term, the number of buyers is ridiculously low right now and creating an extremely favorable market. Regardless of what one decides to purchase, the bottom line is that simply sitting on money is the wrong way to approach this crisis as our dollar will likely be terribly devalued five years from now.