Is the Credit Crisis hurting the Real Economy?

That is, after all, the political rationale for enacting the Paulson plan: that the credit crisis on Wall Street is, or will cause significant harm on Main Street. That was also the subject of many of the questions Congressmen asked of Secretary Paulson during his testimony last week. Doubts that the problems on Wall Street will effect Main Street are one explanation proposed for the popular opposition to the Paulson Plan. Although the conventional wisdom among pundits seems to be that, if unchecked, the credit crisis on Wall Street will have dire consequences on Main Street, there are some skeptics. Below are a few examples.

- Binyamin Appelbaum, writing in the Washington Post last week ("Smaller Banks Thrive out of the Fray of Crisis"):

Banks throughout the United States carried on with the business of making loans yesterday even as federal officials warned again that their industry is on the verge of collapse, suggesting that the overheated language on Capitol Hill may not reflect the reality on many Main Streets.

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"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. "We're doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine."

- Alex Tabarrok, writing on his blog Marginal Revolution last week ("Where is the Credit Crisis"?):

[H]ere we are in September and bank credit continues to look very robust.  As Robert Higgs points out consumer loans are up, commercial and industrial loans are up, even real estate loans are up.  Overall, total  bank credit is up with just a slight sign of leveling off in recent weeks.  So where is the credit crunch?

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I wonder how much real lending was actually being generated by asset backed securities. Could it not be that most of the funds generated were used to buy more asset backed securities? (The growth in these securities is certainly suggestive of that possibility). If that is the case then it explains why the real economy has been remarkably resilient to the "credit crunch."

- Alan Reynolds, writing in Forbes yesterday ("Bank Loans Have Not 'Dried Up'):

Contrary to many comments, consumer and industrial loans actually increased in the latest week. Troubled giant banks have cut back on lending, but smaller banks have picked up the slack. Consumer and real estate loans dipped insignificantly through Sept. 17, remaining much higher than they were a year earlier.

If all the recent hysterical chatter about lending being "frozen" or "shut down" refers to anything real, it is not about banks loans (through Sept. 17) but about such arcane financial markets as asset-backed commercial paper or loans between banks. But this too is mainly about financial firms, not Main Street. Non-financial commercial paper increased from $156 billion at the start of the year to more than $204 billion from Sept. 3 to Sept. 17, dipping only modestly since then."