Where is the Credit Crunch?

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.    


If banks are repatriating securitizations on their balance sheet, "total bank credit" goes up without any new loans.
I would treat the claim that "consumer loans are up, commercial and industrial loans are up, even real estate loans are up" with a lot of caution, this is more a case of out the shadow (banking system) and into the light.

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Well thought out, nice post.

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Good hypothesis.

"Investment banks were selling these securities and using the money to lend to whom?"

Here's mine: see Wall St. bonus figures last year.

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Here's one very recent example: http://acrossthecurve.com/?p=1687

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Interesting hypothesis but I am having a hard time looking at things like interbank lending, and the crunch facing investors, in a vacuum.

I am thinking it just hasn't hit the masses as hard yet. Maybe we can expect to see credit card limits drying up, more difficulty getting car loans, etc., in the future.

So I say focus on rebuilding the broken bridges to keep the money flowing before the worst hits.

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Superb analysis. I haven't checked your links to confirm your claims, but given the premises your conclusions must follow.

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So, what happens when all the bridges collapse?

Because that seems like a realistic scenario!

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Why do you use quantities instead of prices? I look at prices. If LIBOR minus OIS is record high, if
3-month Tbill was at zero, if junk bond spreads are close to record highs, if even AAA spreads are
wide, if the dollar is trashed, if gold is soaring, doesn't that give self-evident data on the credit

How about this for an alternative to the Paulson plan. It might have a gross cost of $1 trillion. The
government goes to all low-income households owning a house with a subprime mortgage. The government
gives the household a voucher to payoff the entire mortgage. In exchange, the goverment gets 50% of
the value of the house whenever it is sold. A debt for equity swap. The restriction: participating
households may not take out another mortgage or HELOC on the house.

Households always have a repayment option on their mortgages, and that risk is known to MBS buyers.
The repayment of the subprimes means that MBS buyers get their principal back. They will be very
happy about that. It would recapitalize the banking system, which is the goal of the Paulson plan
anyway. But we don't have to nationalize the banks to accomplish it.

It would mostly eliminate subprime delinquencies and foreclosures. It would keep houses filled, rather
than empty. It would keep low income people in houses. It would preserve neighborhoods from the
impact of vacancies and foreclosures.

Moral hazard would be limited by the requirement that half of the equity be surrendered to the government.
Only those facing foreclosure or who are underwater would want to participate in such a program.

The McMansions crowd would be on its own.

I bet the program could be wrapped up in a year.

Yes, it is unfair and interferes in markets. So is every other plan, be it Paulson's, Dodd's, or
just letting the FDIC close all the insolvent banks.

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There are, broadly, two types of loan: portfolio loans, held by a bank or other intermediary on its balance sheet, and securitized loans, originated by a financial intermediary and sold to special purpose entities which issue securities. The volume of the second type of loans has shrunk to essentially zero, thereby greatly decreasing the volume of originations that financial institutions can handle. The volume of the first type is flat, meaning that portfolio loans are not remotely replacing the reduction in loan availability occasioned by the collapse of the securitization market.

Incidentally, securitization proceeds are generally used to acquire existing loans, which then move off the balance sheets of financial institutions, freeing up their capital for new originations. Securitization proceeds are not generally used to originate loans.

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Not all lending is equal. There may be plenty of loans still being made, but not to the lowest tier consumers and that's affecting a lot of businesses.

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What are you basing the "UP" on? I consult in the real estate industry and it is very difficult to get financing for commercial and multi-family real estate deals right now.

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why let alex do it?...why don't you explain how this statement is false?

"just becuase a counterfeiter prints up money, it does not mean that "capital is freed up for investment"...no bulldozers were conjured, no humans gained new programming skills, no additional ore was mined. All the new currency by some fractional reserve bank has done is increased the number of people bidding on certain kinds of real finite capital."

maybe you consult your copy of the communist manifesto to explain why a central bank is so vital.

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"thereby reducing available capital by 50%." The only capital destroyed comes when the bombs are blowing up factories or we double our prison population in a span of 20 years. Making fewer loans does not reduce the real capital available.

The very idea that making loans is good for it's own sake, just because it "creates capital" is the type of thinking that led to incentivizing people to make liar loans in the first place.

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Mr. Taborrak, Ms. McArdle. Ms. McArdle, Mr. Taborrak:



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CI loans are up because no one is buying privately-issued securitized debt.

I have a hunch that when banks write-down a lot of their consumer and residential portfolio, there will be revisions to this series.

You bring up interesting points, but I think you may need to look at the data more thoroughly and expand your data set.

My own hunch is that this is a sounding board for another 'There Was No Housing Bubble' article ;)

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B.H., for all the government intervention ideas mooted in the last weeks that I've seen, yours is the only one that rivals the Paulson/Bernanke reverse auction plan as not being obviously flawed. It has a number of very nice features which you point out, such as injecting needed capital into banks. (A few months ago, I was urging people to put their "stimulus" checks into their bank accounts rather than spending it for this reason).

But you and Paulson both may be neglecting a large potential cost to the taxpayer. If current mortage paper prices are, to use Bernanke's terms, accurate as "long-term hold" values as well as "fire sale" values, real estate still has a very long way to go down. The money to pay off an entire recently originated mortgage may not be recouped even if the government got 100% of the equity, much less if it only gets 50%. With the feds buying mortgage paper in reverse auctions, there is also a big risk from underestimating the real estate downside (severely depressing the foreclosed collateral behind the mortgage paper), but only if the banks themselves make this overestimate (wishful thinking) or if corruption occurs and government overpays rather than engaging in honestly competitive reverse auctions. (Neither too unlikely, alas).

My hunch is that, contrary to the wishful thinking (or at least public statements) of those holding mortgage paper, the mortgage paper market actually reflects real estate values better than current real estate prices, which are quite sticky, do. In other words, much U.S. real estate is worth only a fraction of its current selling prices. We'll get to see if this hunch is correct.

Comrade Alex's idea doesn't work for reasons that would be obvious had we not contracted the Panic: governments have no expertise figuring out who the good and bad commercial credit risks are. Comrade Nick signing off for now...

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Very interesting analysis. I wrote a blog post looking at different places $700 billion could be spent, starting with ideas of propping up the intermediaries, and ending up in a very similar place.

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Now if we were leverage that $700 billion at, say 20-1, that gives us $14 trillion dollars to play with, er, invest (and if we were a hedge fund, we could leverage probably leverage this at 50-1)! I'm pretty sure we could then buy a huge chunk of the world, and maybe save Social Security and Medicare... (I expect we'd also need some currency hedges).

All kidding aside, yours seems like a reasonable paradigm to evaluate this morass we've found ourself in, and perhaps begin to find some smart answers...

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This is one of the most important steps in this program. By the time this step is completed you will have three excellent credit
references to place on your next credit application. Why is this important? The next time you fill out an application take notice on
how many references it asked for. They usually ask for three. The “Three Bank Maneuver† is designed specifically for that
reason. This method of credit building is perhaps the finest way today of obtaining beginning bank credit. Instead of Banks, you
can also use Savings and Loan, Credit Unions, or even a combination of all three.

To operate this maneuver you will need some beginning cash. Use as little as $1,000 or as much as $5,000. The more you use the
better. It is important to remember that this money will not be spent. It will be kept as security in a savings account until you are
through using it. We recommend that you start with $1,000.


The first thing you need to do is locate your three banks. Get your local yellow pages and call around. Ask for the loan
department and ask the following questions. What is the yield on savings accounts? What is the minimum a bank will loan on a
passbook savings account? What is the percent you can borrow? You must also ask what credit bureaus they subscribe to, and if
they report automatically, and if so, how often.

Once you choose your three banks, the first step is to go to “Bank A† and open a passbook savings account. (Do not put money in
any other type of an account, even if it does pay a higher rate of interest) Take your passbook home and wait three days. Then
return to “Bank A† and ask to see a loan officer. Look your best, be courteous, and explain that you wish to take out a loan for
which you are willing to place your passbook as collateral. This is the easiest type of loan to get because it is totally secured with
cash. Most banks are willing to loan you 85% of the amount you have on deposit. When you take out your loan your savings
account is frozen, however, every time you make a payment you unfreeze an amount equal to your payment, less a few dollars for
interest. Be sure to ask that the loan be for at least one year, with minimum monthly payments. Do not get a simple one year loan
with no payments. This will serve you absolutely no benefits whatsoever. What we are trying to establish is a payment history. You
will not be turned down for this type of loan no matter what your previous credit history is and in most cases it will not even be
checked. If you have bad credit, make sure you tell your loan officer before he pulls your credit history. Tell him you are trying to
re-establish your credit, and that a good credit rating is very important to you now.

Once you have obtained your $850 loan (85% of $1,000) take your money to “Bank B† and open a second passbook savings
account. Wait three days and go get your second loan. This time in the amount of $723. (85% 0f $850). Again be sure it is an
installment loan of at least twelve months. Take the money to “Bank C† and open another passbook savings account. Wait three
days and go get your third loan. This time it will be for $614 (85% of $723). You now have three bank loans totaling $2187 and
$614 in cash. Now don’t worry! You might be asking how you are going to pay off $2187 in loans with $614, but it is easy. As we
mentioned before, every time you make a payment, and amount equal to your payment minus the interest is “unfrozen† in your
account. (Figuring an interest rate of 12% on that $79.33, $8.50 is interest charged). Subtract this interest from the $79.33 and you
get $70.83. This is the amount of principal paid back. Since your savings account calls for a 15% cushion above your loan
amount, when you pay the $79.33 you “unfreeze† $70.83 which can be withdrawn without disturbing your loan collateral.


By the time you get your third loan, your first payment will be approximately seven to ten days away on your first loan. At this time
take enough of your $614 to make your first payment. Do this at “Bank A†, “Bank B†, and “Bank C†. At this time you are ahead
of your due date by one week at “Bank A†, two weeks at “Bank B†, and three weeks at “Bank C†. You have used $205 of your
$614, but at the same time you have unfrozen about $182 of your frozen funds which you can withdraw at any time.

Now wait about three weeks and go back and make your second set of payments. At this point you will be approximately a full
month ahead on all your loans. With the balance of the $614, make your third payment at each bank on the second payment’s due
date. Now you have spent the $614, approach each bank and withdraw the funds that have become unfrozen. This will be about
$545. Once again use this to make your monthly payments, always one full month ahead of schedule.

Continue this process through the sixth month. You can pay off your loan in full after you have reached your sixth month or you
can follow it all the way through. It is not advised to try to pay them off prior to the six months as six months is unofficially the
minimum history allowed when considering an account as a possible credit reference.

Remember, the entire reason for this process is to establish your three banks as future credit references.


In this example, the interest rate was 12%. However, the savings accounts were drawing 6%. This means your net interest cost
was only 6%. The amount of interest charged for “Loan A† is $102. The amount of interest you will receive on your passbook
savings account is $51. Therefore, we subtract $51 from the $102 and get a total one year charge of $51. This amount is only
$4.25 per month. But since you are paying off the loan after making the sixth payment, your true cost is:
“LOAN A† Six Months at $4.25 $22.50
“LOAN B† Six Months at $3.61 $21.69
“LOAN C† Six Months at $3.07 $18.52

That’s a small amount to pay for three references that you now have, and you still have your $1,000. It would be an excellent idea
to contact your bank and ask what credit bureaus they report to. Contact the credit bureau and ask them to send you a “Credit
Addition Form†. On this form you list the piece of credit to be added, and mail the form back to the credit bureau and they will do
the rest.

Now, six months have passed, and the majority of your bad credit should have been erased from your credit file, and you should
have three excellent credit ratings. You are now ready to go to the next step.


If you wait until you have completed your three bank maneuver you should be able to get a Visa of MasterCard at just about any
bank you wish. If you are in a hurry, it may be necessary for you to apply for a secured card.

Now that you have your credit card, it is time to go shopping. First of all, go to a jewelry store in the mall near you and purchase
an item that is equal to near the maximum of your credit card. Be sure not to buy a sale item, and find out how long you have to
return the item for a full refund. Buy the item on your credit card and enjoy it until you have to return it. Be sure to return it
before the final return date. At this time they will issue you a credit memo for your credit card. What is interesting is that a credit
to your card is the same as a payment, and it will show on your credit report as a high, a “0† balance, and a “as agreed† payment.
Next, go to a bank and make a cash advance near the maximum of your credit limit. Do not spend the money, but wait until your
billing date and make a prompt payment in full. There will be a small charge for this, but it will provide you with yet another rating,
separate from the previous rating. Now you can go to Sears, Wards, Mervyns, or many other department stores, and by showing
your Mastrcard or Visa, qualify for one of their credit cards.


The final item to re-establish your credit is probably the easiest. What is necessary for you to add years of excellent credit history to
your credit profile, is the love and trust of a friend or family member who has good credit.

Each month when they receive their credit card bills, they are asked if they wish to add anyone to their credit card. By having them
answer “YES† and adding your name, they will in fact cause a new credit card to be issued in your name. They will, however, be a
co-signer on that account. Since even those who love you don’t normally want to jeopardize their credit rating, you should have
them use their address on the application. When they receive the card, ask them to cut it in half, thus rendering it useless.

What will happen though is that by the issuing of the card it will automatically create an entry on your credit report, and instead of
showing the application date, it will show an opening date of when the original card was opened and the entire credit history of that
card. Therefore, without jeopardizing your friend’s or relative’s credit history.



learn more about credit repair here and know how to permantly raise your credit score

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I just heard that yesterday Caterpillar got a loan at 7% interest where last week they would have paid half that.

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This analysis overlooks the very decline in commercial paper outstanding. For large corporate borrowers that is the preferred borrowing method. General buyer is the money fund. What has happened is that the slightly lesser quality issuers are not able to roll it over as easily. The alternative for them is the bank loan or drawing on that bank LOC. Bank lending is going up to replace some of the decline in CP outstanding.

If you take a look at the price of GE stock you will see that the market has really hammered them lately. GE Credit is one of the largest issuers of CP. The question hs been broached that they may not be able to roll it. That is the cause of the big spike down a few days ago.

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Where can I find the details of the bailout plans?

There aren't any details. Paulson's official plan was (I hope this form of it at least is dead) to give the Secretary of the Treasury (that would be Paulson, for now) unlimited and unreviewable authority to spend from a floating amount (not to exceed $700 billion at any one time, but that could certainly far exceed $700 billion in total) in any way he likes, and to deprive all courts of any jurisdiction over any resulting disputes or violations of the law, including violations of the law by the Secretary or his executive branch agents.

Unofficially, there are all sorts of clever untried ideas for how to spend the money being floated about by Paulson and Bernanke, not unlike the many clever and untried ideas being floated about on MR.

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The data Alex links to are all for commercial banks, which are some of the most regulated lenders and have been weathering the crisis pretty well. When you look at the data for the overall economy, borrowing has collapsed. Even in the second quarter of this year, borrowing by the nonfinancial sector was less than half what it had been in the last quarter of 2007. One shudders to think what's happening in the current quarter. So, I'd say the credit crunch is very real.

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"next, Jar Jar Binks will be tricked into testifying before Congress in favor of the plan."

He already has:

"I will let Alex or another person with a degree in, you know, economics"

I bet degrees in economics is positively correlated with dumb decisions that caused this crisis and the inability to have predicted it, and dumb ways to fix it.

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That's kind of funny


Lending/Borrowing so far this year is almost exactly what it was at in 2003. Now, who on earth would have thunk that? Again, 3 guesses and the first 2 that aren't Austrian don't count.

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It seems to me that the problem is in public capital markets generally. I can't find exact figures, but last week was the slowest for issuance of new securities in almost 20 years. And even now, the only deals getting done are ones where the issuer is very well known and can get a deal done overnight. Smaller issuers have very little ability to get funds in public markets.

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No credit crunch? Are you all serious?

I guess the last comment on this thread is "Largest Bank Failure in US History"

WaMu just failed....

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