The NYT warns readers that the credit markets are still facing "paralysis." It notes the decline in loans and especially securitized loans, for residential mortgages, commercial mortgages, and consumer debt. While the numbers are accurate, the article completely ignores the demand side of the equation. There has been enormous overbuilding in both the residential and commercial real estate market over the last 4 years. This has led to a plunge in property values in both sectors. It is not surprising that lending would plummet given this decline in prices. In fact, we would expect lending to plummet even if the banks were all completely healthy. There will be an ongoing issue with private securitization (as opposed to securitization by government run companies like Fannie Mae and Freddie Mac) due to the market's concern about the integrity of the banks and credit rating agencies. The willingness of the banks to pass along junk assets and the credit rating agencies to give them investment grade ratings will impede securitization for some time to come. Unless the structure is changed and/or the perpetrators are punished, investors will have little confidence that they are buying good assets.
--Dean Baker
