What does a credit crunch look like?

Maybe Alex is tired of this topic, if so I apologize.  But Isaac Sorkin sent me notice of this:

What does a global credit crunch look like when it comes down to raw numbers? A 3% quarterly decline in international banking activity. It doesn’t sound like much, but it represents $1.1 trillion–and that was just a snapshot taken at the end of June, before the Lehman Bros. collapse worsened the crisis in interbank lending.

It is also three times bigger than the largest contractions of the past three decades–as long as such records have been kept. After the demise of hedge fund Long-Term Capital Management in 1998, international banking activity fell by 1.2% in the fourth quarter of that year. After the dot-com bubble burst, the contraction was 1%, or $125 billion–chump change compared with today’s banking volumes.

The numbers come from the provisional international banking statistics for the second quarter of this year, released Thursday by the Bank for International Settlements, the Basel, Switzerland-based organization that acts as a lender for central banks.  BIS says most of the decline was accounted for by "short-term interbank credits in U.S. dollars," i.e., banks not lending to each other overnight–the logjam…we have heard so much about being at the heart of the credit crunch.

Note that is only from the second quarter; we’ll see what the third quarter statistics look like.  Here is the BIS link.  Note that second quarter lending was as robust as it was in part because of continued lending from Europe to Eastern Europe and also to Iceland.  That’s more reason to worry, not less.


A credit crunch is when you can't afford to make hyperlinks render with the same size font as the rest of the text.

So, you convinced me ;-)

I've been giving some thought to the Fed statistics. Total credit has expanded during this crunch according to the data. However, if I bought $10,000 in corporate bonds a couple years ago, those bonds are not worth anything close to $10,000 on the open market today. Is the Fed data marked to market? If you did mark the Fed data to market, does the picture change at all? My guess is that if you use the discount that is applied to the bond market, total credit actually has contracted. Otherwise, how is it possible that anyone is defaulting? Why isn't the debt just being rolled over?

This is what a credit crunch looks like:


Here are some anecdotes about CFOs who are having their revolving credit lines cut and are losing a source of working capital:


A 3% quarterly decline in international banking activity. It doesn't sound like much, but it represents $1.1 trillion--and that was just a snapshot taken at the end of June, before the Lehman Bros. collapse worsened the crisis in interbank lending.

After the dot-com bubble burst, the contraction was 1%, or $125 billion--chump change compared with today's banking volumes.

Is there any particular reason that from 2000 to 2008 banking volumes should have grown so much that 2000 numbers look like "chump change?" 3% being $1.1 trillion means that 1% if $367 billion... so volumes nearly tripled (not adjusted for inflation) in eight years. Is that reasonable? Or does that suggest that volumes went too high? I'm certainly not an expert in this.

Tyler, you should know that the BIS is not a lender for central banks. The IMF is. Once again you quote someone that doesn't know what he's talking about.
Regarding the data, you should know that whatever happens in a particular credit market is not indicative of what happens in all other credit markets. In addition you should know how much double accounting there is in financial statistics. Before checking carefully the reliability and relevance of data, please don't claim anything.

I think Andrew's correct: there will be bleedover from both sides.

"The most serious financial problem for the Nazi State is not the danger of a breakdown of the currency and banking system, but the growing illiquidity of banks, insurance companies, saving institutions, etc. . . . Germany's financial organizations are again in a situation where their assets which should be kept liquid have become 'frozen'. . . . But the totalitarian State can tighten its control over the whole financial system and appropriate for itself all private funds which are essential for the further existence of a private economy. Yet the institutions which still exist as private enterprises are not allowed to go bankrupt. For an artificial belief in credits and financial obligations has to be maintained in open conflict with realities."

From Gunter Reimann, The Vampire Economy: Doing Business Under Fascism (1939), p. 174, about German economic policy under Hitler.

you guys gave your written support of a fascist "bailout" plan.

Gabe: you are the best commenter on the site. Tyler's problem is that he has been drinking too much tap water.

Keep your essence pure...

LIBOR OIS & TED spreads ended the week down 21% and 27%CP Yields on 90day paper increased to 4.9% on Firday, posting a 14% decrease for the week

5 year spreads on A-rated corporate bond increasing 4.9% and B-rated bonds increased 3.7% for the week.

Tyler: You're beating a stick against a brick wall. If Alex cannot see a credit crunch in today's market then his beliefs (theories?) are impossible to refute. Facts be dammed. Alex has his beliefs and he's stickin' to 'em.

Alex: I will start reading your posts again the day you eat crow without apology and explain how your extreme ideology has led you astray.

If I may, this is what a credit crunch looks like:

From Bank Rate.com http://www.bankrate.com/


30 yr fixed mtg 6.31% 6.00%
15 yr fixed mtg 5.94% 5.69%
5/1 ARM 6.09% 6.00%
30 yr fixed jumbo mtg 7.58% 7.46%
5/1 jumbo ARM 6.25% 6.18%

$30K HELOC 5.37% 5.32%
$50K HELOC 5.20% 4.98%
$30K Home Equity Loan 8.28% 8.00%
$50K Home Equity Loan 8.28% 7.72%
$75K Home Equity Loan 8.25% 7.72%

36 month new car loan 6.82% 6.82%
48 month new car loan 6.59% 6.59%
60 month new car loan 6.60% 6.60%
72 month new car loan 6.44% 6.44%
36 month used car loan 7.19% 7.18%

None of that looks too scary to me.

The only thing that Alex's stats and charts indicates to me is that this isn't your grandfather's credit crunch. On that point, he is surely correct.

As for the rest, we're just getting bogged down in a definitional morass. What is a credit 'crunch' anyway?

I also don't understand why Alex chooses to focus on quantities and not prices, except that it helps to validate his priors. He also misses the profound effect of bank re-intermediation (collapse of the shadow banking system), which is difficult to pick up in the numbers, because, almost by definition, these entities operated in the shadows.

There is a second issue: if last year, a loan officer would give you 100% LTV, 7x (undocumented) income, while this year, he will offer MORE mortgages, but only at 70% LTV, 3x documented income and a higher spread over Funds, is that a 'crunch' or not?. There's tons of money available, but not on the terms that a tapped-out, savings-poor, Joe the Plumber could possibly contemplate. Now this may just represent reversion to prudent lending standards, but it feels pretty crunchy in a world that has become adapted / addicted to cheap financing.

Maybe it's like the old recession / depression joke: when your neigbour's loan application gets bounced, it's a return to prudent lending standards, when your loan application gets bounced, it's a full-blown credit crunch.


The credit crunch is so real, so vast and worldwide, so undeniable, so well documented here, in newspapers, and in good blogs like Calculated Risk, that my jaw drags on the floor when I see folks like you and Alex so blind to reality.

Well, I don't know of any non-financial business adversely affected by the credit crunch. I do know of some luxury markets hit hard by the drop in home prices (less people are buying boats in south Florida now, for example).

Where is it well-documented? Where is the real data showing profitable businesses closing down? Anecdotes can be found anywhere, to support any conclusion. I'm not saying you're wrong, I'm just saying show me the data!

It's peculiar to refer to my beliefs and extreme ideology when all that I have done is present MR readers with as much data as I can get my hands on.

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