Month: October 2008

Daniel Klein has a new project:

The prospective symposium will consist of confessional essays by economists about their existence as economists. Only genuine narrative and sincere reflection are welcome. However, essays may be anonymous.

The impetus of the symposium is to provide an outlet for exploring preference falsification and other forms of moral or intellectual compromise within the economics profession. Authors are encouraged to be introspective and personal, and yet impartial. The purpose of each essay should be to share experiences that speak to situations to which many can relate. We seek biographical essays that will help others understand widely shared problems.

In his or her essay, the author should clarify the kind of preference falsification in which he or she has engaged.

Mark Thoma gives us eight credit series from the St. Louis Fed. He is somewhat surprised to discover that all show positive growth over last year. I think most people who have heard talk of the credit crunch would also find this surprising. Let’s be clear, however, almost all the series also show declining growth. Let’s also be clear that the financial sector is a huge mess. Furthermore, we are in a recession that is likely to get worse especially because growth is declining around the world.

I think of credit as not just a current period flow but also as an option; this is implicit in many of Fischer Black’s pieces, including "Banking and Interest Rates in a World Without Money."  If you lose the option to borrow that is a credit crunch too.  As for the current financial crisis, my view of the data is that many borrowers have been drawing on their pre-existing lines of credit like crazy, for fear that their chances to borrow may be drying up.  Banks have felt liquidity squeezed, in part because of pending CDS settlements, in part because so many borrowers are exercising their borrowing options, and in part because of potential insolvency.  That liquidity scramble is why we have been seeing such a huge TED spread and near-zero nominal rates on T-Bills.  Even now it remains unclear whether these options will be replenished and of course if they are not that means trouble.

The collapse of "borrowing as an option" shows up in market prices and it also shows up in many anecdotes, as chronicled at calculatedrisk.blogspot.com.  It does not necessarily show up in current period credit flow data and in fact it may show up counterintuitively as a spike in borrowing.

I am puzzled by Alex’s admission that there is a recession; no matter which way you assign the causality, doesn’t that mean credit should be contracting?  Working within the confines of his own view, shouldn’t Alex be worried that credit flows remain so high?

I believe if we had an explicit series measuring the borrowing option. and its recent collapse, it would show the credit crisis very clearly.  In the meantime that crisis does show up in other pieces of information.

Addendum: Here is comment from Mark Thoma and also Felix Salmon.

Contra Tyler (see below) neither the post from Free Exchange nor Mark Thoma’s comments "rebutting" the Minn. Fed study, Four Myths About the Financial Crisis of 2008, are compelling or well thought out.  The Minn. Fed. presented data demonstrating that four widely reported claims about the credit crisis panic are myths – do either of the cited links claim that any of these myths are in fact true?  No.  Do either of the cited links present any data at all on the quantity of credit?  No.  Many people cite prices/rates/spreads as evidence for the crisis but what we ultimately care about is quantity not price.  The Fed. piece had lots of data on the quantity of credit.  Where is the rebuttal?  Does Tyler cite any data at all or lay out his counter-claims?  No.

Consider the major item that these links suggest as evidence of the crisis.  Amazingly, it’s "an unusual spike in bank lending during the
crisis period."  That’s right, an increase in bank lending is evidence of the crisis.  The argument is that lack of credit elsewhere means that firms are drawing on their line of credit at banks.  One problem with this is that Paul Krugman made this argument way back in February when I said that the lack of credit was being overblown.  Thus the "crisis period" keeps changing.  In February, the crisis was in February, now Thoma is saying it’s just the last few weeks.  More fundamentally, the whole point of a line of credit is to keep credit flowing when one source dries up.  A commentator at Thoma’s site nails this one:

Saying that credit availability is so ‘severely’ endangered that
borrowers are forced to utilize credit from banks isn’t the most
persuasive argument. What next?

"Gasoline supplies had withered to the point that I was forced to fill up at Texaco instead of Chevron!" 

Finally, Tyler and both of the cited pieces attack a stupid claim that obviously neither I nor the Minn. Fed. piece made, namely that the interventions by the Fed. have had no effect.  Obviously, they have.  But the story the media and the commentariat are reporting is that there is a credit crunch, credit is frozen, firms are starved for credit, we are on the verge of a Great Depression etc. The story has not been, ‘despite some problems in the banking sector quick action by the Federal Reserve and plenty of alternative non-bank credit has insured that credit continues to flow to nonfinancial firms.’