Is the credit malaise really over?

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Interestingly, the Fed raised the discount rate last week as bank credit for the week contracted by a further $9 billion, According to David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, “this brings the year-to-date decline to $115 billion, or a 14% annual rate, with every component from mortgages, to consumer credit, to business lending shrinking”.


Source: Breakfast with Dave – Gluskin Sheff & Associates, February 22, 2010.

“There is no way the Fed is hiking the Fed funds rate with bank credit in secular decline and all bets are off on the sustainability of any recovery; a sustainable recovery without bank credit growth – that will be a new one. … a true tightening in monetary policy is still likely a 2011 story at this point. Those who were surprised by the early timing of the discount rate hike last Thursday should consider that perhaps the Fed wanted to have the market distinguish the move from an actual policy shift by doing it as far away from an FOMC meeting as possible,” said Rosenberg.

As mentioned before, it is difficult to see a significant economic recovery without the banks coming to the party. And this begs the question: Is this what the policymakers had in mind when bailing out the banks?

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