West's Credit Crunch Still Harming Recovery

One of the great ironies of the economic crisis is that although too much credit is what got us into trouble, it's a credit shortage that's hurting us today. A new report from the European Central Bank notes that while the major European economies have emerged from recession, euro-zone banks are continuing to tighten lending, particularly to small firms, which could hurt job growth. And things could get worse for big firms, too, because rising government deficits will likely crowd bond markets, leaving little room for corporate (rather than sovereign) bond issues.

Things aren't any better across the Atlantic. While U.S. bank lending should be increasing by this stage of a recovery, the opposite is happening. Last week U.S. bank lending contracted another $30 billion, bringing the total decline this year to $100 billion--a historic 16 percent drop. "The credit contraction is actually accelerating," notes Gluskin Sheff chief economist David Rosenberg, and it's happening across all categories: consumer loans, real estate, and commercial and industrial loans.

Another irony is that amid all this, Fed chairman Ben Bernanke has begun discussions about how central bankers can further curb credit growth. This is likely due to the fact that economists often fight the last war, which in this case is inflation. True, it's already a problem in faster-growing emerging markets. But it's not yet in the U.S. and Europe, where banks sitting on record cash hoards need more, not less, encouragement to lend. If they don't soon, the Great Recovery may never get off the ground.