Thursday, May 28, 2009

Credit Conditions Showing Clear Improvement

In the wake of the Lehman Brothers collapse last September, and the subsequent banking and credit seizure that ensued, numerous monetary and fiscal measures have been implemented to revive the flow of credit and get the heart of the economy pumping again. These programs have brought about much cynicism, and have pundits and the media questioning the solutions that are being used to fight the current crisis. Some think the programs are turning capitalism into socialism, some are worried about how we will pay for these policies, and many are convinced that current policy is sowing the seeds for hyper-inflation in our future. However, one question that may not be garnering enough attention within the mainstream press is, how effective have the programs been in terms of restoring the flow of credit to the marketplace?

On that front I believe that the weight of the evidence is showing an unambiguous improvement in credit and liquidity conditions. One composite we have been following lately is the Bloomberg U.S. Financial Conditions Index (chart below). The index has ten components and was designed to gauge and assess the availability and cost of credit in the U.S. financial markets. Without getting complicated, as the line falls it signals that credit conditions are deteriorating, and as it rises it indicates that credit conditions are improving. As you can see it has been climbing and is now close to where it was prior to the Lehman Brothers bankruptcy. I agree with the pundits that there will be many unintended consequences resulting from recent policy actions. However, the measures taken thus far do appear to be helping to restore the flow of credit to the marketplace, and that is something that all investors should be welcoming as good news.