Newspaper article THE JOURNAL RECORD

Credit Crunch a Private-Sector Clampdown by Banks

Newspaper article THE JOURNAL RECORD

Credit Crunch a Private-Sector Clampdown by Banks

Article excerpt

So there really is a credit crunch, after all, despite the Federal Reserve's earlier comment that it could find none in its regular data.

This crunch, however, seems not to be directly managed by the Fed, whose job it is to regulate the flow of funds to the banks, and therefore to the economy. It is managed instead by the banks themselves.

It is, you might say, a private-sector clampdown, one in which the banks have funds available to them but aren't making funds available to businesses, especially small ones and those involved with commercial real estate.

The information, from a survey by the Fed itself, tends to resolve what had seemed to be a contradiction - small businesses complaining they couldn't get sufficient credit but the Fed indicating it wasn't tightening the flow.

Regardless of the source, business again feels it is victimized. It makes no difference who is the source of their distress, the Feds or the bankers, since the impact is the same.

Oprators of small businesses especially say it is an old story, recalling that just a decade ago the prime lending rate rose to 21.5 percent for the very best corporate customers. For small businesses it was more like 25 percent.

That 1981 crunch was Federal Reserve-generated, and many businesses, ranging from proprietorships to some with sales close to $50 million a year, succumbed or were bought up. It was one of the worst recessions ever.

In fact, by some measures the early 1980s recession was the deepest since the Great Depression of the 1930s, a debacle some historians say was worsened when the Fed tightened up early in that decade and loosened too late.

Some business people still argue, in fact, that the double-digit interest rates that developed in the late 1970s were due as much to Fed miscalculation as to the robustness of business and consumer spending. …

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