Back in February I pointed out that despite all the talk of a credit crunch commercial and industrial loans were at an all-time high and increasing. At the time, Paul Krugman and others responded that this was just temporary as firms drew on previously existing lines of credit. Well here 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?

A credit crunch does exist in the sector of the market based on short-term, asset backed securities. In addition, interbank lending is unusually risky. But in light of what I have just said the "credit crunch" takes on a new meaning and potential new solutions are suggested. The first question I have is this. Investment banks were selling these securities and using the money to lend to whom? I do not know the answer. But let’s suppose that the money being raised in these markets was being lent to productive businesses. If so, then any solution should focus on feeding those businesses that are starved for credit.

I look at the situation as follows. Banks are bridges between savers and investors. Some of these bridges have collapsed. But altogether too much attention is being placed on fixing the collapsed bridges. Instead we should be thinking about how to route more savings across the bridges that have not collapsed. Government lending may be one way of doing this but why lend to prop up the broken bridges? Instead, why not lend directly to the investors who are in need of funds? After all, if these investors exist and have valuable projects that’s where the money is! Let the broken bridges collapse, taking the shoddy builders with them. Instead focus on the finding and rescuing the victims of any credit crunch, the investors who need funds.

Now here is a hypothesis. It may be that there just aren’t that many firms in need of funds. First, one reason that bank lending is up may be that firms with good projects have already turned to the substitute bridge of ordinary bank loans. Second, 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."

Now perhaps I am wrong about all this. Bernanke has access to a lot more data than I do and he seems very worried. I’d still like to know, however, which credit-worthy firms are credit starved. And I’d suggest that we ought to think more about alternative bridges that will connect credit-starved firms with savers.