Studies on Causes and Consequences of the 1989-92 Credit Slowdown.
Darrat, Ali F.
The 1989-92 period represents years of both sluggish economic growth
and sharp credit slowdown in the United States. Analysts and observers
have debated whether demand or supply factors in the credit market are
behind the credit crunch, whether the credit tightening contributed to
the recession of the early 1990s, and what implications, if any, would
such credit slowdown have for the proper conduct of monetary policy and
its ability to stimulate the economy.
The current volume under review is a valuable collection of thirteen
studies addressing the above issues as prepared by several economists at
the Federal Reserve Bank of New York. M. A. Akhtar conveniently begins
the volume by an excellent and stimulating overview of the various
theoretical and empirical issues discussed. Although not explicitly
divided, the first part of the volume (seven studies) examines the
nature and possible causes of the 1989-92 credit crunch, while the
second part (three studies) deals with the economic impact of the credit
slowdown. Another study (by Hilton and Lown) addresses the implications
of the credit tightening for monetary policy, and the last study (by
Hickok and Olser) looks into the reason(s) behind a similar credit
slowdown in a number of other industrialized countries.
After the "Overview" of Akhtar, the next two studies (by
Mosser/Steindel and Lown/Wenninger) take up the issues of the causes of
the credit slowdown and conclude that weak supply rather than weak
demand factors in the credit market are primarily responsible for the
credit slowdown. However, both studies admit that it is difficult to
disentangle the influences of demand from those of supply in the market.
Next, Johnson/Lee ask whether there is a link between balance sheet
riskiness of the early 1980s and the subsequent loan downsizing, and
their empirical evidence seems to answer the question in the
affirmative. The main message of the study by Demsetz is that standard
data from balance sheets of banks greatly underestimate the severity of
the recent slowdown in bank lending. The concern of Seth's study is
with the causes and consequences of changes in foreign bank lending and
the role they played in the U.S. bank credit crunch. The evidence seems
to suggest that overall foreign bank lending in the U.S. increased
during the recent period, mitigating the severity of the credit crunch.
Another interesting finding of Seth's study is that, contrary to
domestic bank lending, nonsupply factors appear to be the main force
behind changes in foreign bank lending. The study by Hickok/Olser,
awkwardly inserted at the end of the volume, examines issues related to
those of Seth. It investigates the reasons behind the recent credit
slowdown abroad, particularly in Japan, the U.K., and France. These
authors report that noncyclical factors, most notably financial
deregulations, played a dominant role in the foreign credit crunch.
While most studies focus on bank lending, Cantor/Rodrigues inquire into
the sources of the decline in nonbank credit during the turbulent
1989-92 period. Unlike previous episodes of credit difficulties, nonbank
credit was also declining in 1989-92, reinforcing the slowdown in bank
credit. Cantor/Rodrigues also find no compelling evidence for the claim
that falling loan demand triggered the recent bank and nonbank credit
slowdown. This conclusion is echoed in the following study by
Hamdani/Rodrigues/Varvatsoulis based on macroeconomic data. However,
results from survey data suggest a contradictory verdict, assigning a
key role to weak loan demand in the credit crunch.
After analyzing the possible causes of the credit slowdown,
researchers in the volume shift their attention to possible consequences
of the slowdown. Mosser starts the effort and concludes that the credit
slowdown did hamper monetary policy's ability to stimulate the
economy but that the credit crunch per se played no important role in
the sluggish economic performance in the early 1990s. The finding that
credit slowdown had no significant effect on real economic activity is
corroborated by Harris/Boldin/Flaherty's study for the construction
sector and by Steindel/Brauer's study for the nonconstruction
sector. Finally, Hilton/Lown report empirical results which seem to
suggest that the credit slowdown of 1989-92 explains a large portion of
the deceleration in M2 over that period.
This collection of studies is a valuable and welcome addition to our
understanding of the credit market dynamics and its linkages with the
rest of the economy. All studies are well-written, and many are
thought-provoking with theoretical innovations, novel empirical results,
and interesting policy implications.
Ali F. Darrat Louisiana Tech University
