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. In September I once again pointed to data showing that bank credit continued to be high (even if growth was slowing.) At that time I also discussed how bank loans were not the only source of funds for business investment and that many substitute bridges exist which transform and transmit savings into investment. I suggested that despite the panic the problems which exist in the financial industry may be relatively confined to that industry.
Three economists at the Federal Reserve Bank of Minneapolis, Chari, Christiano and Kehoe, now further support my analysis pointing to Four Myths about the Financial Crisis of 2008.
- Bank lending to nonfinancial corporations and individuals has declined sharply.
- Interbank lending is essentially nonexistent.
- Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
- Banks play a large role in channeling funds from savers to borrowers.
Each of these myths is refuted by widely available financial data from the Federal Reserve. It’s a short paper, read the whole thing.
None of this means that everything is cheery. Like most people I think that we are in a recession which is likely to get worse but we need to remind ourselves that recessions are normal. What is not normal is the current level of panic. The panic feels to me like an availability cascade.
Hat tip to Mike Moffatt.
Addendum: By the way, I wouldn’t be surprised if credit does start to go down but it will do so because of a fall in the demand for credit not primarily because of a fall in the supply, again an entirely normal aspect of all recessions.