The credit crunch: I still cannot agree with Alex and Bryan

Alex is a very good truth-tracker but on credit I remain stubborn in my belief that there is a credit crunch.  Here is one report:

How is trade finance coping with the credit crunch

Badly. Steve Rodley, director of London-based shipping hedge-fund Global Maritime Investments, puts it bluntly: "The whole shipping market has crashed." The trouble is that credit is the lifeblood of commerce, but it is built entirely on trust. And that has evaporated. As such, many ship owners can’t get banks to issue letters of credit, particularly on cargoes of price-volatile commodities that no longer look like adequate collateral. Even those who can get letters of credit are finding that their counterparties may no longer trust the credit rating of anything other than large, well-established banks, many of which are now charging big premiums. Letters now cost three times the going rate of a year ago, according to Lynn.

Here is another report.  Here are other reports.  Or read this account:

What’s more, the dollar-denominated trade finance lines that exporter companies rely upon to do business are drying up in dramatic fashion amid the global credit crunch. In Brazil — the world’s top exporter of beef, iron ore, sugar and coffee and the No. 2 exporter of soy — total outstanding trade lines have fallen by half this month to around $18 billion.

Here are simple and in my view decisive quantitative indicators of the current domestic credit crisis.  Or here is another report:

According to experts interviewed by Bloomberg, "letters of credit and the credit lines for trade currently are frozen," and as a result, "nothing is moving".

Or here is a recent survey of U.S. retailing CFOs:

Some 41 percent of US retailers are seeing tight credit as a result of
the crisis in the banking sector, and many will cut staff and reduce
buying as a result…

Many other surveys paint a similar picture.  I can only repeat my earlier words that immediate credit flows are demand-driven and they do not measure bad credit conditions concurrently because they stem from prior bank commitments.  To suggest, as commentator Tom does (and Alex endorses), that we have no credit crisis until lines of credit are exhausted, is in my view sheer logomachy (I like that word).  Nor is my view "convenient" or unfalsifiable as was suggested.  Here is Wikipedia on lagging indicators and yes it tells you that standard forms of credit fall into this category and this has been understood for some time.  Look instead at the currently informative pieces of the evidence and you will see that they point in a very consistent direction. 

It is true that many credit channels have not shut down.  But the ones
that are shutting down are enough to cause a severe global recession.   

Addendum: I added this comment to the discussion: "People, financial markets and financial institutions around the world
are falling apart. I’m not pulling this stuff out of a hat or from a
few crazy journalists. There is massive disintermediation going on
right now, much of it in the shadow banking system. I am trying not to
be dogmatic but it is hard for me to see on what grounds anyone would
deny this."


Might I suggest that the proper way to solve a "trust" problem is with transparency. One might be able to successfully break through the logjam by creating a new kind of information market.

The alternative would seem to be to allow the crisis to continue until the government acts to nationalize the "non-trusted" institutions and solves the information problem by owning it all, not to mention all the assets as well. Highly wasteful, not to mention a strategy that exposes taxpayers to an enormous amount of risk and imposes immense deadweight losses on positive economic activity.

I'm still having a hard time sensing the big difference. Lending could still be going on, yet, at the same time, businesses and banks could be preparing to cut back in the near future because of concerns that:
1) Funds will dry up
2) Fewer people will borrow
3) Banks will be very tight in lending.
It could well be that there is no crunch or severe contraction showing up so clearly as yet because no one is sure what the government's actions will be or accomplish, and it's not clear how severe the downturn might be. It seems like your data, which you and others understand better than me, points to an impending crunch, while Alex's is showing that the crunch hasn't hit as yet, or not to the degree that some have predicted.

I've been reading these exchanges with great interest. I can well believe that there is a crisis, and that it could get (unnecessarily) worse if we do not take dramatic actions. However, I do think it is reasonable to ask for some evidence - and the more supposed evidence that appears, the more skeptical I get. The latest evidence that Tyler posts is not convincing to me. Of the 5 powerpoint slides, 4 of them show interest rates (not quantities) and one shows the quantity of overnight commercial paper - clearly something that has collapsed but does not match the rhetoric about credit throughout the economy drying up.

The statistics from shipping are pretty dramatic. The collapse in the Baltic Dry Index is scary - but it has dropped to levels last seen in 2005, when I don't recall anybody talking about a crisis. Can somebody please explain why it is crisis for that index to reach levels not seen for 3 years? Where is the new mortgages issued data? The only "evidence" I've really seen is the Minneapolis Fed data. Sure, it may miss the point (although the comment that it might be believed if it was from the NY Fed was pretentious and insulting and unfounded), but at least it is evidence. Why is it so hard to find some clean data that shows just how hard it is to get credit now? And, I'd like data on how it is hard to get credit if you are a good risk. The fact that risky borrowers are having a hard time getting credit sounds more like a solution than a problem to me.

Even those who can get letters of credit are finding that their counterparties may no longer trust the credit rating of anything other than large, well-established banks, many of which are now charging big premiums. Letters now cost three times the going rate of a year ago,

Oh Noes!!!!1 You might have to pay 3% for a letter of credit instead of 1%. That will have HORRIBLE side effects because OBVIOUSLY consumers could never handle a 2% increase in grain prices. I mean, I've paid 4% more per year for the last three years, but OBVIOUSLY the market couldn't possibly sustain 2%.

This is just like the ATROCITY of banks having to pay .2 bps more on interbank loans (5% instead of 4% annualized on a one-month loan). Obviously, banks are entitled to pay .2 bps less than they are now, and they are ENTITLED to that rate, and we must do everything in our power to prop up businesses models that sensitive to small changes in interest rates.

*rolls eyes* *jerk-off gesture*

I gotta say, Alex's analyses are looking much more compelling right now. Most of what you just posted is good evidence for the statement "a lot of people think there is a severe credit crunch right now". Alex argued (successfully imo) that those people are wrong.

People, financial markets and financial institutions around the world are falling apart. I'm not pulling this stuff out of a hat or from a few crazy journalists. There is massive disintermediation going on right now, much of it in the shadow banking system. I am trying not to be dogmatic but it is hard for me to see on what grounds anyone would deny this.

Yep, the level of insouciance is striking. Anyone who has been reading the WSJ with any level of attention for the last month has seen lots of reports of tighter trade credit. I would rather not wait until the point that we're fighting for canned beans at the Safeway.

The "decisive quantitative indicators" are not decisive at all, at least not in answering the question at hand. The 3-Month T-bills and High-yield bonds are not really relevant here. The other three, in so far as they are related to credit, are only about banks lending to one another. No one is denying that banks are having trouble lending to one another, that is a market signal we should not attempt to go around.

The bottom line is that these are banks that have taken very bad decisions and are now in deep trouble. No one wants to lend to them, and they shouldn't be forced to.

People who deserve to be lent money have been hit only a very little. I got a new credit card last week with excellent rates. Many industries have not reported any trouble, and the evidence Alex presented is pretty convincing. That the banks that should be bankrupt can't get credit doesn't show that there is a credit crisis, it shows that they're bad institutions.

However, because of the bail-out and all the extra tax burden and inflationary effects it is likely to have, there will probably be a credit crunch in the rest of the economy soon. At that point, the end of the world drum-beaters will have gotten the world to match to the reality they've been telling us about.

A few distinctions might be helping, to avoid "logomachy" (thanks for that) and just simply talking past each other.

  • Credit collapse: inability to lend, at any price, because of capacity wipe-out
  • Credit disaster: price of lending is at economically destructive levels, even though the capacity to lend exists
  • Credit dislocation: a sudden, panic-driven, temporary financial revaluation causing credit prices to spike (or fall)
  • Credit adjustment: an economic dislocation, driven by event, perceived or real, that causes a step-up in the assessment of all credit risks (or a step-down), with serious, but not severe, economic adjustment
  • Credit tightness / scarcity: temporary restrictions in lending *levels*, that may or may not crimp real activity in a mild way
  • Credit pinch: paying slightly more for the same amount of credit, just enough to squeeze profit margins and be a real pain

Globally, all of these seem to be happening or have happened to various degrees.

Everyone is correct. Yet, no one is "right". :-)

btw, this is just an informal listing


In response to your (2) point, I don't think you're taking into account the supply side of inter-bank loans. If LIBOR is too high compared to other funding sources then this is an arbitrage opportunity. All banks must do is:

(1) borrow from the Fed at low rates
(2) lend to banks at higher LIBOR reates (pushing LIBOR rates back down)

Therefore I can think of two reasons that LIBOR is still high:

(A) banks are afraid other banks will fail
(B) banks have lost more money or will lose more money than they have admitted and just don't have enough cash to pursue the arbitrage

Either way, high LIBOR remains an indication that banks are in bad shape and that their credit is scarce/costly.

I recently incorporated my consulting business, mostly for health care reasons. (As in, insurers wouldn't give my son a policy, even with a rider, because of his heart murmur.) I opened my business checking account about 2 weeks ago. Because of this argument between the Titans of MR, I decided to apply for a credit line with my bank, even though I don't really need one.

I'm sure you are all waiting with baited breath to hear the answer. I have to turn in the form on Monday. We'll have to see, but the lady gave me no indication that I might be denied.

So in addition to all of the measures Alex has reported, and all of the anecdotal stuff people like David Henderson (and my next door neighbor, a very successful businessman in our city), I will have yet another data point, assuming they give me a line of credit. And keep in mind, I haven't proven jack squat to them. It's not like they can look at eight years of sales data for my business, or that they read MR and realize I am a genius.

Finally: If they deny me a credit line, then I will side with Tyler...

Alex's account of the non-existent "credit crunch," with its reams of data

Reams of data are worthless without insight.

I say we all just agree to tie the question to Bob Murphy's impending credit line (or lack thereof). If he gets it, Tabarrok was right; if not then Cowen wins.

Here's a data point for you: over the past few weeks, my firm has turned down deals where we have complete confidence that we will be repaid in full at fantastic economics. Why? There is a risk of a MTM markdown before year end and nobody wants the hit on their book, even if the P&L comes back before maturity. This isn't capacity wipe-out. It's willingness wipe-out.

The "four myths" paper includes among its myths that "Interbank lending is essentially nonexistent". Certainly this has been a common claim, so I went looking for data. Most commentators simply quote LIBOR rates, which doesn't address the "spreads versus levels" argument. So far I've only found one financial-press claim about the *levels* of interbank lending, and this is from the UK late last year:

"The sterling interbank market has collapsed at the fastest rate in modern history, prompting pleas for immediate rate cuts from a chorus of top British economists.

"Office for National Statistics data sourced to the Bank of England shows the volume of market loans in the banking system plunged from £640bn at the onset of the credit crunch in August to £249bn by the end of September, suggesting British lenders have been hit even harder than US banks in relative terms. Total sterling assets dropped from £3,244bn to £2,876bn."

I have not found the official source of the figures, so I can't see how they were framed officially. But that drop in the "volume of market loans" is a 50% drop within two months, during a period when Chari et al's Figure 5A shows nothing remotely comparable happening to interbank loans made by US commercial banks. Can anyone explain this discrepancy?

If there is no credit crunch, why are we bailing out the banks?

There are a lot of complications here, but I suspect that, while some series in the US have shown recent drops, such as commercial paper, the main reason we have not seen declines in various measures of loans is precisely due to the interventions by the Fed to keep banks from failing outright. Most of those that have "failed" have been bought up by other banks, often at fire sale prices, and also the Treasury bailed out AIG, the main insurer for the huge, global derivatives market.

So, the question is, what would have happened if the Fed and Treasury and other central banks had not engaged in their various "bailouts"? I would suggest that the relevant history here is indeed 1931, and what happened after the Creditanstalt in Vienna failed. For those who are unaware of what happened (and Ben Bernanke is extremely aware of what happened), this was followed, domino-like, by a string of bank failures in Germany, then France and Britain, then the US and Canada, then Japan, and on further, over a period between May and August, 1931. There is no question that this greatest of all financial failures was the event that pushed what had been a bad recession into the Great Depression.

So, some here may well argue that we should have repeated the experiment, but most observers would say that it has been wise of the various central bankers around the world not to do so.

I would also note, more or less agreeing with Tyler, that the complaints we have been reading about have been coming from virtually all over the world. Maybe in the US the Fed (and Treasury) have managed to keep the volume of lending up, or maybe it even would have stayed up if the Fed had practiced "hands off" since August, 2007. But these tales and fears have been coming in from all over. Are we dealing with some global conspiracy of statist scoundrels here, or a panic based on real phenomena, some of which occurring in the shadow banking world of high level derivatives trading, is not all that visible in some data?

It seems that the most powerful argument in favor of there being a credit crunch is simply that the US government has bailed-out those bankers with trillions of dollars, which means they must've believed there was a credit crunch. And since government is made up of infallible honest geniuses, this means that there is a credit crunch.

And if you don't believe that, and insist on looking at real evidence and data, then you're just an irresponsible maniac who hates America and wants to see the world end and doesn't understand economics.

It's fashionable right now to claim that this is because of branching (i.e. lack of regulation in Canada), which is a bit absurd given that most of the last twenty years comparisons always note how much more regulated the Canadian banking industry is.

Yeah, because if something's been true for the last twenty years, then it's absurd to think it wasn't true in 1930.

Blackadder: fair enough, poor formulation on my part. Keep in mind, though, the reason the '30s experience is brought up is specifically to say that (lack of) regulation is not the issue. Fast forward to now, when there would seem to be both more and more effective regulation of banking in Canada. I wish there were more information on other aspects of regulation in the 1930s - as I'm skeptical that the branching issue was the only difference of relevance. As opposed to this one issue serving as a hitching post for whatever pro/anti regulation point wants to be made.

My figures show overnight interbank lending by commercial banks to have remained between $350 and $400 billion in September. The figures actually peaked in mid-september.

Looking at the effective Federal Funds rate, it remains below target. It is below 1% most days.

No interbank lending? (The interest rates don't matter because there is no volume?) Does anyone look at this figures? Interbank loans by commerical banks didn't reach $300 billion until 2007.

Libor looks at the rates paid by 20 major money center banks. Maybe they aren't borrowing much and if they do, they pay a lot.

But the total amount being lent overnight by U.S. commerical banks to other U.S. commerical banks remains large. And the interest rates remain low.

The crisis is that some banks cannot borrow from other banks. That banks refuse to lend to some banks. And, those banks that cannot borrow are large.


Please, focusing too much on just the US and Bernanke and Paulson, is delusional. Whatever is going on here is a global crisis. Iceland has gone bankrupt. Several countries are now banging on the door of the IMF, including Hungary and Pakistan, with several others rumored to be about to. They are not doing so because B and P engaged in a fallacious or silly bailout. Very bad things are going on out there in the financial markets of many countries.

Tyler, you are correct that logomachy is going on here. But you should understand that it is not innocent in nature. The crisis-deniers have the same basic worldview and have similar motivations as the Holocaust deniers. They are collectivists who are looking out for the standing of their collective, and if the facts threaten that, then the facts be damned. It is the same mentality that Bush, Graham, and others had when they insisted only a few months ago that all was well in the economy--until the bad news was undeniable. Apparently, it was not as undeniable as we thought. These people can forever find new ways to logomachinate.

Tyler, it seems at core your main audience does not at all understand what has happened at all. Can you explain it to them? You must be able to make a nice clear, simple summary by now.

We've had quite a few mergers, some plain nationalizations, and some supportive bail-outs. More are probably on their way.

The idea that WaMu, the former investment banks, Fortis, HBOS, etc. AIG, Citadel, etc. Iceland, Pakistan, Hungary, and the UK, as well as other sovereigns we will probably find next week kneeling at the IMF's door, not to mention the states of Cali and Mass were ALL making this up to pay off Paulson's friends is frankly a crazy conspiracy theory. Sorry to be so blunt.

But hopefully some people will start to finally get the point. I beg you Tyler to make a nice summary so your readers - and apparently some of your colleagues - begin to understand this.

There's a difference between being a truth-telling contrarian and just being permanently out to lunch. Alas, some of your "lunch posse" appear to be the latter, not the former.

nor can you make assumptions based on the stories of "I couldn't get credit" therefore there is a crisis. I don't think it makes much sense to count how many stories there are of each type - that wouldn't qualify as the wisdom of crowds.

Comments for this post are closed