Banks, Lending, And Recovery: A New, Upbeat TheoryKaren Pennar
A year ago, growth in M2, the monetary aggregate consisting of currency and bank and thrift deposits, was sagging, and what seemed a nascent recovery soon petered out. Now, after a rebound early in the year, M2, the money measure that the Federal Reserve seeks to control, is in retreat, giving rise to renewed worries that once again, recovery may falter.
Not to fear, say some Wall Street economists. The narrower M1 has been growing strongly even though M2 has sagged, and a number of special factors suggest that both M1's strength and M2's weakness may be overstated.
Low interest rates, says economist Robert V. DiClemente at Salomon Brothers Inc., mean that it doesn't cost much for depositors to keep money readily available in the checking and now accounts counted in M1. Mortgage principal payments have surged, and those monies are lodged in checking accounts that inflate the M1 measure. The broader M2 measure, meanwhile, may be held down by restructuring in the banking and thrift industries, which has shrunk overall deposits. The impact can be seen on the lending side. Economists at Merrill Lynch & Co. observe that as recently as 1985, banks and savings and loans together accounted for more than 50% of private nonfinancial debt. Today, "that share is down to 37% and sinking." So M2 growth may not be as vital to economic recovery as it was in the past.