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US Credit Crunch Persists, Experts Say

WILLIAM CROZIER compares lending by banks to business with fishing for bluefish in the Atlantic Ocean. The fisherman looks for birds flying above water stirred up by a school of the fish. Then he tosses his line into the water.

"But there ain't any birds circling or any agitated water in the private sector," complains the president of BayBank Inc., a $9.5 billion bank based in Boston.

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The analogy was prompted by a research paper offering fresh evidence of a "credit crunch" in New England. The issue has national economic-policy implications. Joe Peek, a Boston College economist, and Eric Rosengren, an economist with the Federal Reserve Bank of Boston, see weak lending by banks as offering a partial explanation for the sluggishness of the economic recovery in the United States.

"Real estate losses, combined with increased regulatory scrutiny of bank capital, have resulted in substantial shrinkage of bank assets," they state. Banks have cut back their loans or other assets, not because business isn't available, but because the banks must do so to comply with regulatory requirements about the ratio of a bank's capital to its assets (such as commercial loans, Treasury securities, home-equity loans, and auto loans). Since a bank in some trouble has difficulty raising new capital by

selling stock, it must shrink its assets to restore a higher capital-to-assets ratio. Rules dampen expansion

The goal of the regulators is to return banks to financial soundness. But the rules dampen business expansion, the two economists say.

At a conference put on here last week by the Boston Fed, Mr. Crozier said he doubted the existence of such a crunch. The decline in loan activity was caused by slow demand, not because banks were turning away more customers than usual.

But Kenneth Guscott, a real estate developer in Boston's black community, says many of his suppliers complain that nowadays they can't get adequate bank credit lines.

Federal Reserve Board chairman Alan Greenspan as early as July 1990 attributed weak economic growth to problems with credit availability. Since then the importance of this issue has been hotly contested among economists and officials.

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Richard Syron, president of the Boston Fed and thus one of the nation's monetary policymakers, said there are at least half a dozen "structural impediments," including the bank regulatory problem, dragging the economy down. These factors include the high debt burden of consumers, the fear of unemployment, the decline in value of houses and commercial real estate, new business regulation, and the cost of litigation to business.

Asked if the Fed had a responsibility for overcoming this economic inertia, he replied, "To some degree." The central bank, he noted, has already lowered short-term interest rates by a total of 7 percentage points since their previous peak. A different recession

"For a variety of reasons, this is a significantly different recession than those in the past," he said.

The Peek-Rosengren paper notes that growth in national output in the first year of the present recovery has been 1.5 percent, less than half the growth rate for the first year of any other postwar economic expansion.

Some economists blame this on the Fed for not pushing interest rates down sufficiently to overcome the economic inertia and increase the money supply that fuels economic activity. One narrow measure of money (M-1) has been growing at a 7.4 percent annual rate in the past three months, but a broader measure (M-2) has shrunk at a 0.8 percent annual rate in the same time span. Peek and Rosengren note that all "monetary aggregates" have grown vigorously in the initial states of previous recoveries. The two a dvocate changes in one bank regulatory requirement, dubbed "leverage ratios," that they say presently worsens the business cycle. But banking problems generated over a decade will require substantial time for resolution, they warn.

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