Academic journal article ABA Banking Journal

Biting the Hand That Feeds

Academic journal article ABA Banking Journal

Biting the Hand That Feeds

Article excerpt

We have been hearing the term "credit crunch" for about a year now. It first surfaced in regard to the controversial crackdown by regulators on real estate loans in the Northeast.

Through frequent repetition of the phrase, it has come to be accepted that a credit crunch applies everywhere-that all banks everywhere have stopped lending. This is nonsense.

First of all, the point is missed entirely that bankers want to lend. Lending is their bread and butter.

Second, there is plenty of evidence that banks are still lending. Anyone reading the profile of NBD Bancorp in last month's issue would know that. Furthermore, the results of a survey of community banks that appears on page 18 of this issue found little evidence of banks being reluctant to lend. Rather it found quite a bit of evidence of customers' reluctance to borrow. Northeast pain. There is no denying, however, that in certain parts of the country undergoing severe economic strain-the Northeast being a prime example-credit is less available. And there's no denying that this hinders the economic recovery of these regions.

Even so, the causes of a credit crunch in such regions are not a black and white matter. Bank- regulators, for example, have been castigated for overreacting to troubles in Texas by clamping down too hard in the Northeast.

Clearly that is a significant factor. An earlier and less extreme regulatory intervention would have brought a much softer landing, it seems to us. But other factors came into play as well, not least of which was speculative excesses in the latter years of a long expansion. Frankly, some banks in the region and elsewhere made many loans that shouldn't have been made. The industry is not perfect. Economic linchpin. All the talk of a credit crunch, regardless of who is to blame for it or where it exists, points out rather dramatically how vital the banking industry is to the economic health of this country. Tamper with the industry unnecessarily or ignore its concerns too long and you will soon be biting the hand that feeds you.

Much has been said about how the Federal Reserve has learned the lessons of the 1929 crash when it tightened instead of easing. …

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