For all the screams about credit markets, it remains true that there have been far fewer problems with long term lending. It’s short term lending where the issue has arisen, as money market funds pulled out of commercial paper, as banks preferred not to lend to each other, and as everyone rushed their short term money into treasuries.

Still, long term credit for things like mortgages has been and is tightening. Most recently General Electric’s finance arm (which generated half its profits last year) announced that it’s been tightening its credit and will be lending less going forward, with an aim of reducing GE’s dependence on its financial sector to make its profits. (Though, at 40%, finance will still be the biggest contributor.)

This general slow contraction of credit to consumers and business is the slow killer of this crisis. Much of it has been based off of fluctuations in the short term markets. A lot of credit is loaned at LIBOR plus, and if LIBOR is spinning round and round it makes it hard for institutions like GE to determine what rates they should be lending at.

Short term credit problems will be fixed in the next month or two, even if in order to do so Central Banks have to effectively either take over the lending themselves (as with the Fed buying up commercial paper) or if they have to guarantee all loans. (Though I think that will only reduce LIBOR somewhat as a large part of the LIBOR spread is not counterparty risk but the fact that banks have to lend at below inflation.)

Short term credit being fixed will soothe long term credit markets somewhat and should ease credit somewhat. Nonetheless, pretty much every finance company in the world is going to be tightening credit to consumers and businesses, no matter what the central banks prime rates are. They have too much risk on their books already and don’t want more, plus even with capital injections many banks will have very impaired loan books and will want to take on only the best debt.

So, if there’s going to be money to help the economy out of its deepening recession, it is not going to come from the financial sector. That means it will have to come from the government, in terms of a stimulus bill. More on that in a piece tomorrow.

Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in Pogge.ca and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

His homeblog is at http://www.ianwelsh.net/

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