Credit Crunch or a Lack of Credit Demand?

Over at Marginal Revolution, Alex Tabarrok suggests that the current problems are more the result of a lack of credit demand rather than the lack of credit supply.

Just looking at the numbers, Alex has a point. Outstanding loans and leases at large banks are up by 5% over the past 4 weeks, after being flat for most of the year.

But I would draw a further implication—this is not a crisis of confidence rooted in the financial system, but rather a wrenching readjustment rooted in the global real economy. Financial stress is a symptom, not a cause.

I’m going to post a longer piece later on this, but basically the idea is that investors and companies are realizing that their assumptions about the global economy are wrong—that the situation where the U.S. consumes and borrows and everyone else produces is not sustainable. And the fall in the global stock markets and the general havoc is the result of that shift in assumptions, rather than a collapse of financial markets.