A new report from financial consulting firm Celent argues that there is no credit crisis, and that the publicly available data from the Federal Reserve Bank directly contradicts the doom-and-gloom public statements made by its chairman Ben Bernanke and Treasury Secretary Henry Paulson.

The research follows up on the October report issued by three economists at the Federal Reserve Bank of Minneapolis entitled "Facts and Myths about the Credit Crisis." That report showed that, despite the drumbeat of news about the frozen credit markets, bank lending to businesses, consumers and other banks has actually stayed steady or increased during the past 18 months.

That report generated a bit of a stir, mostly because it offered little explanation for why the data doesn't square with public sentiment. If bank lending is actually accelerating, as the data shows, then what's all the fuss about? Portfolio.com's Felix Salmon weighed in at the time with his theory: it makes sense that bank lending increases at the beginning of a credit crisis, because companies are forced to draw down credit lines when the bond market shuts down.

Celent doesn't try and explain the data but instead calls into question the legitimacy of statements by Bernanke and Paulson. In a speech on November 20, for instance, Paulson said this:

"By mid-September, after 13 months of market stress, the financial system essentially seized up and we had a system-wide crisis. Credit markets froze and banks substantially reduced interbank lending."

But data from the Fed shows that overall U.S. bank lending has grown "steadily and consistently," reaching its highest level ever in October 2008. Interbank lending has increased by 60 percent since mid-2006 according to the Fed's data, and actually reached a record high in September, the same month Paulson claimed it was "substantially reduced."

There are similar inconsistencies between what Bernanke stated to Congress in late October about consumer credit with the data made available by his own organization in the same month.

So, what gives? Celent concludes that one of two scenarios is possible: 1) Bernanke and Paulson have access to far more data than is made available publicly and that data is painting a far more grim picture of the state of bank lending. "However, it is hard to see why the Federal Reserve Bank itself would publish and continue to publish information that it knows is misleading at best, and simply wrong at worst," the report notes. 2) The Feds are reacting to a situation at a particular set of businesses and banks and are incorrectly generalizing these to the whole economy, which would mean that the policy tools they are using are the wrong ones.

According to Celent, Bernanke and Paulson are either misleading us with their data or they are grossly overstating the credit situation in their quest to solve a specific set of problems within a small subset of the financial industry.

Either way, it doesn't bode well for the policymakers who have a lot more explaining to do.


by Megan Barnett