Rising Rates of Interest Aren’t a Signal of a ‘Credit Crunch’

“Hear that? It’s the sound of credit crunching all across America.” Those are the words of Catherine Rampell, columnist for the Washington Post. Rampell sees higher interest rates at banks as the source of what she imagines to be a credit crunch, but consider what she’s saying:

“I’ve been struck by how many retail bank storefronts no longer prominently advertise the rates they charge for mortgages; instead, bank windows are emblazoned with the high rates they pay on certificates of deposit (CDs). That’s a sign that they’re trying harder to bring money in than to find ways to lend it out.”

The problem with Rampell’s analysis is that if banks were quite literally trying harder to bring money in than lend it out, they would be insolvent in short order. Think about it.

Rampell is clear that banks are aggressively trying to attract funds. Translated, they’re paying up to “rent money” from savers. Rest assured they’re not paying a premium to rent the money because they lack an immediate way to lend it out. Banks aren’t money warehouses, rather they’re money intermediaries. And when they’re “trying harder to bring money in” it’s a certain sign they’re trying even harder to lend it out.

In other words, the presumed “credit crunch” reads as anything but. If banks are paying more to get funds in the door, it’s not because they want to stare lovingly at the dollars.

Still, what to make of the loss of storefront signage indicating low-rate mortgages? It could paradoxically be said that less aggressive mortgage rate offerings (meaning low-rate mortgages) similarly indicate a movement away from credit tightness. That is so because far from an indication of banks pushing the envelope, an accent on low-cost rates of interest on mortgages logically signals banks moving away from risk. And yes, housing is low risk. Precisely because there’s a recoverable asset underlying the mortgage, mortgages rates are logically lower than a typical loan to a business.

For historical context on the above truth, consider Nike legend Phil Knight. While he could easily secure a home loan in Portland during Nike’s early days, local banks in Portland wouldn’t touch Nike. Really, what could they recover if, as Knight routinely expected, the company went out of business? For the longest time Nike’s “headquarters” were above a bar, and included charming touches like a broken window. Knight could get the roof over his head financed, but financing of his business dream was a multi-decade battle.

All of which brings us to the nominally low interest rates that banks formerly paid for funds, and that they didn’t as much advertise. Was this a sign of low-cost borrowing? Not really. Reversing Rampell’s own logic, banks plainly weren’t trying very hard to attract funds not too long ago, which means they didn’t see a lot of worthy lending opportunities. When bank rates are low, it’s not a sign of those same banks aggressively trying to rush money out the door. Quite the opposite.

Was money “easy” when banks weren’t trying hard? Logic says no. There’s little room for error within banks. Since there isn’t, the general rule about banking is for them to lend those who don’t need the money….If they’re paying very little for funds it’s a signal that they’re also taking very little risk. Low bank rates of interest signal tighter credit, if anything.

Of course, all this leaves out that the vast majority of lending and financing takes place well away from banks as is. Which means the relevance of banks to the U.S. economy is well overstated. It’s a reminder that if there is in fact a credit crunch in the U.S. as Rampell asserts, the last place you’d look to validate the assertion would be bank storefronts.