So what's the truth about the credit crunch?

There is a conventional wisdom that the current economic crisis is grounded in what has become known as the credit crunch – the freezing-up of the credit system.  Hence the pouring of vast quantities of taxpayers’ money into the banking system to free things up.  But there’s a growing school of thought in the United States that suggests that this simply isn’t the case – and that the gargantuan quantities of money thrown at bankers, with no strings attached, was handed over on the basis of a false analysis.

One example is this article from the Wall Street Journal, which quotes a number of reports suggesting that the credit crisis was simply not as bad as it was painted.  The most noted of these is a paper prepared by economists at the Federal Reserve Bank of Minneapolis in October, which suggested that inter-bank lending – widely presented as being the core issue in the credit crunch – was in fact running at healthy levels.  And a survey of small business in November confirmed that lending was at healthy levels. Now neither of these reports is arguing that the economy in the US is in anything other than a dreadful state – simply that this particular widely-trumpeted feature of he current travails is simply not happening.

The real reason for the economic problems, critics argue, is simply that the what was generated in the boom years was paper wealth, not the real thing; when the bubble burst, people stopped spending, and both individuals and businesses simply stopped applying for loans as a result,  argues Joshua Holland in a recent Alternet piece.    As Holland argues, the issue is crucial; if there is no credit crunch, then the case for throwing money at banks evaporates.

So, if not needed to free up the financial system, what happened to the money.  American columnist David Sirota argues that it was all about corporate profit:

We were punked by those politicians and pundits who said what we had to do to fix the problem was not to both inject capital into the real economy (spending on infrastructure, health care, unemployment benefits, mortgage relief, etc.) and target reasonable amounts of well-overseen taxpayer cash to the specific banking sectors that required immediate aid, but instead to exclusively throw an ungodly amount of unregulated money at Wall Street while completely ignoring the real economy, and more specifically, to throw that ungodly amount of money at Wall Street with absolutely no strings attached.

That argument was not backed up by fact. It was a lie – and a lie with a motive: to make sure as much taxpayer cash as possible was given to one of the largest segments of campaign contributors, and that that cash could be used to subsidize executive pay, shareholder value, shareholder dividends bank consolidation and financial industry profits. And to date, nobody has been able to answer really simple questions that make this point as clear as possible.

As just one example, consider the fact that when aggregating what both the Treasury and Federal Reserve bank has have done, taxpayers have allocated $8 trillion to the financial industry. In a country where 18,000 people die each year because they lack health insurance (that’s six 9/11’s every single year), most believe it would cost about $75 billion to $100 billion a year for universal health care. So just to account for critics, let’s say it costs $200 billion. How does giving $8 trillion to the financial industry save more lives, better help the economy (whose fastest growing sector is health care) and better benefit society than using that $8 trillion to finance universal health care for the next 40 years and save 720,000 American lives?* The fact that Congress didn’t even ask such a simple question and simply allowed that $8 trillion to be allocated to its campaign benefactors on Wall Street means we were punked in a historic way.

I’ve focussed on the United States because this is where the evidence appears to be emerging into the public eye.  It would be very interesting to hear the truth behind the vast handouts of taxpayers’ money to the British banks.

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2 thoughts on “So what's the truth about the credit crunch?

  1. I am fully with you on the need to put money into the real economy, but I would need to be persuaded that is was not necessary to save the banks. If one or two banks crash, there would have been a run on the banks, and if they go the economy goes too, that’s the theory. Some might say that would be a Good Thing Too, but given the misery that happened in the 1930s (including WWII) the Governments were forced to act. Their first mistake is that they have not imposed radical conditions on the banks, and their second great mistake is that they have not reined in the shadow economy – the derivatives, which are “valued” at 10x global GDP. They are like a constipated elephant in the living room. People are sitting down pretending not to notice, but there are ominous gurglings coming from its stomach…

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