This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

In July, the Kansas City Fed reported – they measure the Kansas City Financial Stress Index (KCFSI), which is an composite index of 11 financial variables that reflects stress in the financial system – that the financial system is much improved since late last year, however, financial strain remains above the previous peak on October 1998 (Russian default).

What does this imply about credit flow right now? It’s anemic; except for revolving home equity lines of credit, credit extended across all loan types is just a few %-points higher than in January 2008 (nearing two years ago), and falling.

Remarkably, the Federal Reserve Bank (see H.8 Tables here) reports that the U.S. commercial banking system is growing credit over the year, 0.5% in July. However, history foretells that credit extension will fall well after the recession has ended, only recovering after job gains have gotten underway.

It’s normal for the banking system not to extend credit when the worthiness of borrowers is questionable. The historical relationship does suggest that the credit crunch will remain in place for some time, with annual credit growth easily falling into negative territory soon. However, history also suggests that a 180-degree turn in credit growth is possible.

Source: Rebecca Wilder, News N Economics, September 6, 2009.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

View original at: Investment Postcards from Cape Town

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