Bill Clinton famously said that the truth of his statement to a grand jury that there is nothing going on with Monica Lewinsky depended on “what the meaning of ‘is’ is”. Switch to the economy. The money men say it is over. The economists say it has just begun. And the politicians are loving every minute of it. Perhaps it all depends on the meaning of the word “it”.

To Treasury secretary Hank Paulson “it” is the credit crunch. “I am encouraged. I am feeling better about the markets,” he said. “In terms of the capital markets, I believe we are closer to the end than the beginning.”

Before you attribute that to the usual cheer-leading expected of a Treasury secretary, consider the words of the great investor Warren Buffett: “The worst of the crisis on Wall Street is over.”

What these money men have in mind is that America’s banking system is gradually deleveraging – writing down the rotten paper on and off its balance sheets, and replacing it with huge amounts of new, real capital. Some comes from sovereign-wealth funds, some from investors willing to buy the dicey IOUs from banks at a healthy discount. All in all, American financial institutions so far this year have raised $46 billion (£23.4 billion) in preferred stock, compared with $27 billion in the same period last year, and $41 billion in convertible and common stock, 10 times the sum raised in the first five months of last year.

Not all observers agree with Paulson and Buffett. The consultancy Capital Economics advises its clients: “Far from beginning to ease . . . the credit crunch is spreading [from] . . . real-estate loans [to] . . . commercial and industrial loans and credit-card lending”. Loan officers at the Fed concur; they point to tightening loan standards that are “close to or above historical highs for nearly all loan categories”.

All these experts are correct. Paulson and Buffett are encouraged by the fact that the difference between interest rates paid on risk-free government IOUs and riskier bank-to-bank loans has declined sharply, suggesting that banks now think it is less risky to lend to one another than it was a few months ago. They also must find it encouraging that the gap – or “spread”, to use money-market jargon – between mortgage-backed securities and ultra-safe Treasuries has halved. The analysts who disagree are more impressed with the fact that the risk differential between safe Treasuries and risky paper remains twice as high as during normal times.

Conclusion: if the “it” is the credit market, it is on the way to a more normal condition, but still not out of the woods.

The other “it”, the one that grabs the attention of economists, is the so-called “real economy”. The housing market remains a drag on the economy. Defaults, foreclosures, and inventories of unsold houses are rising. Prices, which by some estimates are now almost 13% below last year’s level, continue to fall. New mortgages are hard to come by.

A bit of perspective is useful, however. There are 80m houses in America. Some 25m are owned mortgage-free. Of the 55m homeowners with mortgages, about 50m are up to date on their payments. So some 75m of the 80m homeowners either have no mortgages to add to their worries or are meeting their mortgage payments on time.

More important, lower mortgage rates, falling house prices, and modestly rising incomes have combined to make homes affordable again, laying the basis for a recovery. If Black Rock, which is paying $15 billion, representing 75 cents on the dollar, for a portfolio of distressed sub-prime mortgages from UBS, and the several funds that are also buying such paper have it right, we might indeed be at or close to the bottom of the housing market.

Still, the housing industry remains a drag on the economy, which is the “it” on which economists focus. And it is not the only one. High oil prices are siphoning off consumer buying power, corporate bankruptcy filings are up 50% over last year’s level, inflation is raising its ugly head, and . . . well, you have been treated to so much bad news from a gloomy press that it needs no repeating here.

Less prominently displayed is the fact that exports are up, the unemployment rate remains low, nonfinancial companies are once again issuing bonds to fund investment, earnings of nonfinancial companies were up more than 10% in the first quarter, and just-released figures show that retail sales, with the exception of cars, are growing more rapidly than had been expected. And the $110 billion of stimulus cheques are only now hitting consumers’ mailboxes.

The “it” that has politicians excited is the opportunity presented by a troubled economy to posture, to regulate, to spend and, in some cases, actually to do some good. Hillary Clinton and John McCain want to suspend collection of the 18 cent federal petrol tax, which would only open the way for oil producers to raise prices. Barack Obama lays our economic ills at the feet of shady mortgage brokers, greedy oil companies and the undertaxed rich. The leader of House Democrats, Nancy Pelosi, promises to attack the shortage of crude oil by raising taxes on the oil companies that use their funds to explore for new supplies. Last week the Senate voted to maintain restrictions on domestic exploration for new reserves.

There you have “it”. If “it” is the credit market, it is getting better. If “it” is the economy, we seem to have avoided a deep recession, although it is too early to declare victory. If “it” is the political reaction to the aforementioned, all we can do is hope that reason will prevail when the election season ends.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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