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Romer Speaks to Credit Supply and Demand

Rep. Carolyn Maloney (D-N.Y.) filed this guest blog post.

Yesterday's hearing was the first of two that the Joint Economic Committee is holding on "The Economic Outlook." Next Tuesday, May 5th, Federal Reserve Chairman Ben Bernanke will testify before the committee.

Yesterday, the chair of the president's Council of Economic Advisers, Dr. Christina Romer, presented interesting testimony about the recent declines in consumers’ and businesses’ willingness to spend -- the key to our recovery. The loss of wealth caused by the large decline in the stock market and drop in house prices has made consumers more skittish about spending. And with products sitting on shelves, why should businesses be in any rush to ramp up production or invest in any new equipment?

An interesting part of Romer’s testimony was her discussion of the effects of both supply and demand for credit on lending. According to her, the decline in lending is only partly due to a decline in the supply of credit by banks.

Romer pointed out that while much of the decline in lending is due to reductions in the supply of credit, the demand for credit has also declined because consumers and businesses are reluctant to spend.

The policy prescriptions for declines in demand are different than the prescriptions for supply declines. Declines in demand for credit can be addressed through predatory lending legislation, such as my Credit Cardholders’ Bill of Rights which overwhelmingly passed the House of Representatives yesterday, or through health care policies to reduce consumer fears about health care expenditures in the future.

I look forward to hearing Chairman Bernanke's perspectives on this issue, and many others, at next week's JEC hearing.

--Rep. Carolyn B. Maloney (D-N.Y.) is chair of the Joint Economic Committee.

By Sara Goo  |  May 1, 2009; 12:12 PM ET
Categories:  Banking  
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Representative Maloney makes the valid point that the policies required to address disturbances in the supply of credit are different from those focusing on demand. However, the fundamental question of the optimal level of credit demand remains unanswered.

The Bureau of Economic Analysis reports a personal savings rate around 4.5%. This is a 10-year high, however, the average for the quarter century between 1959 and 1984 was around twice as high. The next 25 years saw a slow but steady reduction to 0% with an ever increasing personal debt load before the onset of the present downturn.

It is not clear to me than the current savings rate is "too high". What is not being saved is, one way or another, being spent. Consumption may be "too low" right now, but perhaps it's not very far under an "appropriate" or optimal level in terms of sustainable long-term growth.

I don't see how we can make decisions that effect credit demand until we state our targets for the proper and desirable level of that demand, how else would we know if we're making things better or worse?

Posted by: Indy2009 | May 1, 2009 2:44 PM | Report abuse

The question is how do we not get back to the same point we were at 2 years ago when anyone with a heartbeat could get credit? Transparency and common sense legislation is what will get demand up and hopefully credit flowing again. Can we please stop allowing lenders to disclose in small print on page 8 of a 25 page document what fees will be assessed and when rates will jump? Can we ban "stated income" and neg amortizing loans? Can we regulate CDS and other side letter agreements? People need to have confidence in the system...a few common sense regulations will go a long way to restoring the public psyche.

Posted by: DesolationRow | May 1, 2009 8:25 PM | Report abuse

Rep. Maloney,

You are now talking about the crux of the issue. There has to be a supply AND demand for credit. When it comes to demand for credit, the ability to take on and service additional debt is as important, if not more, than the desire for it. All those who are shoveling money into the banks in the hopes of restarting credit aren't taking into account the indebtedness of the US household. In the end, all you fund is banker bonuses and punish their honest competitors while the taxpayer gets hosed and loses his job.

Posted by: pimpinbenzo73 | May 4, 2009 2:35 PM | Report abuse

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