Where is the Credit Crunch? III

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

The myths

  1. Bank lending to nonfinancial corporations and individuals has declined sharply.
  2. Interbank lending is essentially nonexistent.
  3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
  4. 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.



Have you reconsidered yet your argument in your April 7, 2008 post? Just curious.

Hah! If you click through the link, the paper is titled "Working Paper 666."

were all gonna die.

Now for my less-stupid commentary:

I take issue with the "myths". I never believed that interbank lending was nonexistent, and I don't think most people did. LIBOR shot up past 4% yes, but it wouldn't become nonexistent. It almost is as the paper sets up a straw man or two...

Other things I take issue with:

In the consumer loans graph, I think I see a dip at the end. Maybe it is too early to tell what will happen in the cosumer sector. Additionally, in the commercial paper graph, it *looks* like the nonfinancial sector rates are tracking the financial sector with a lag.

"Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of nonÂ…nancial businesses to borrow from households is highly questionable."
20% isn't really small potatoes.

On the individual borrow side, I'm guessing I'm like most people, and I am paying all the interest I want to. The only way I'm going to borrow is with lower fixed rates.

You'll notice an increase in lending around Lehman's bankruptcy. Curious. What's going on is that banks are lending, but they're just lending from facilities that they committed to years ago but never thought they would ever have to lend to (revolvers, liquidity backstops to CP and municipals, consumer lines of credit).

Re: supply of credit, look at the FRB's Sr. Loan Officer Survey. Lending standards tightesxt on record.

Why anyone would *want* to convert a traditional IRA to a Roth in this environment is beyond me.

You'd willingly outlay capital (pay taxes) on underwater investments when the economy is going down the toilet? Really?

Seriously. Are you saying that there is no credit crunch? Here is some evidence to the contrary.

(1) Net mortgage equity withdrawals by households have dropped to zero.
(2) The Fed's Senior Bank Loan Officer survey finds the net percentage of respondents who are tightening lending standards is one of the highest, if not highest, on record for mortgages, C&I loans, and consumer credit.
(3) Commercial paper outstanding has collapsed, particularly in asset-backed and financial.
(4) Commercial paper yields have risen (until past few days).
(5) Jumbo mortgage rates are 7.8%, the highest in years, despite a near record low on the 30-year Treasury.
(6) Junk bond yields exceed 10%, the highest since the WorldCom bankruptcy.
(7) Even highly-rated corporate bond yields are at a six-year high, despite a 1.5% fed funds rate.
(8) LIBOR is so high, it is as if the Fed never eased.

The argument about C&L loans on the balance sheet misses the point that banks have been forced to absorb liabilities that were kept off their balance sheets. The system balance sheet is shrinking, even though the record balanc sheets are not. The public sector balance sheet is expanding to compensate.

We are in a serious credit crunch, and it has caused a recession. Let's get beyond denial. If the public sector balance sheet had not been expanded to compensate, we would have the worse recession in 70 years.

B.H. it's important to put things in context. Commercial paper outstanding from financial firms has dropped but to the levels of say 2004-2005, same thing with yields. Not the end of the world, not the end of capitalism, not the Great Depression.


I think this reinforces the view that the bailout was another "let's get those WMD"-type operations. I.e. surely you don't think the Paulson was ignorant of these types of facts when he was scaring the heck out of people, saying small businesses were going to miss payroll.

It doesn't get much clearer than this that our credit stimulus plan without a stimulus was negotiated by the government with far too generous a deal. From the Washington Post:


"When the Treasury's program was announced last week, some bank executives said they didn't need the money and resented the federal intrusion. But in a number of earnings calls and interviews in recent days, several bank executives were more receptive.

The federal deal is relatively sweet in financial terms -- it requires banks to pay 5 percent interest annually on the investment over the first five years -- and some bankers said they would not pass it up.

A number of local banks are strongly considering applying for the Treasury program.

Virginia Commerce Bank, which has 26 branches and $2.2 billion in deposits, said it is looking to add $25 million to its capital base by the end of the year. In the past, the company said it was considering issuing stock to raise that capital, but the bank said yesterday that it may apply to the Treasury's program.

"Quite frankly, it is a very attractively priced alternative," chief executive Peter A. Converse told analysts."
How about this, from the NY Times:


"Only a week after the government announced $250 billion in capital for banks, some investors are getting creative in their suggestions on who should qualify.

David Bullock, managing director of Advent Capital Management, wrote a letter to the chief financial officer of GMAC on Tuesday, suggesting that the former General Motors financing arm turn itself into a bank holding company so that it can grab some of the cash.
In Europe, Mr. Bullock pointed out, parts of the auto industry are benefiting from bank rescue.plans. So why not in the United States?."

I'm not making this up. Here's my comment:

“Only a week after the government announced $250 billion in capital for banks, some investors are getting creative in their suggestions on who should qualify.

David Bullock, a hedge fund manager in New York, wrote a letter to the chief financial officer of GMAC on Tuesday, suggesting that the former General Motors financing arm turn itself into a bank holding company so that it can grab some of the cash.†

Come on ! How onerous can the terms of TARP be that people who don’t need it are starting to line up to receive it? What more proof do we need that the government negotiated a terrible deal for the taxpayer?

The next thing we know, Google and Apple will be turning themselves into banks. Can I have myself declared to be a bank?
— Posted by Don the libertarian Democrat

Maybe they're not using the money for lending because they don't need it for that.

If you look at the yield spread for long term bonds, things are not looking pleasant (graph till 2008-10-17):
I'm not convinced that this spread will come down as easily as that of commercial paper market, the more so because a lot of debt is maturing in 2009, compared to 2008.

As a different look at the health of the commercial paper market, note that much more issuance than usual is in the 1-4 day maturity range.

This data simply doesn't square with the reality companies are facing right now.. or at least my company is facing right now.

Why is the CP rate reflected in their chart way less than LIBOR? Perhaps the author's data primarily reflects 3 month CP rates issued prior to the crisis and still outstanding. Or perhaps since company's are using CP less, the overall blended rate hasn't increased very much.

My company's CP is now well over 6%, relative to 3% prior to the Lehman failure. I find it hard to beleive that the data would show a rate as low as 2.5% were it to simply show new issues over the last few weeks, rather than an average rate including pre-lehman CP that hasn't matured yet.

The data might also be skewed by the fact that only the highest quality borrowers still have access to the market.

Also, note Mr. Maguire's correct comment that there is a big dif between overnight CP and 90-day CP... many companies have been forced to go with very short maturities.

Lastly, not sure we should compare current levels to historical levels w/out also considering historical market conditions. A better measure might be looking at rate spreads, for example.

Uhm...This makes stronger the case for ...rent-seeking...an a General crisis claim to concentrate some benefits...If credit did not freeze then what was to be rescued. A precedent was the very same great 'contraction' here Anderson, Shugart II and Tollison about this point found:
"The Fed's policy produced a massive differential failure rate between member and nonmember banks in which the latter were eliminated at a rate at least five times higher than the former." Public Choice October, 1988.

On the other hand, actually credit might have fallen. To re-allocate it to the most eager bidders. If it has not fallen when it should probably the Fed might have done its job but at a cost of mis-allocation of resources.

Its off topic, but I'd convert if it wasn't for the $100K income limit (going away in 2010). If the market further tanks, you can re-characterize your conversion (pretend it never happened) up to the extended due date of your return (10/15/09 if you extend). Just don't pull money out of the IRA to pay the taxes. If market was at $100, drops to $70, you convert, then it drops to $35, you recharacterize, refund the taxes on the conversion and you are back to normal. Wait 31 days, and you can convert again using the $35 value +/- the change in value over 31 days.

More here:

Alex, you are a moron. You should join the yahoos over at FASB.

The recession can be handled. There is a credit crisis, and the data you show are influenced by the bailout measures taken. For a week or two there it was impossible to get a lease on a car or even a lousy $5000 printer from HP even with stellar credit...

1) Though I think that Alex --- as is only natural for a convinced libertarian --- was well intentioned in seizing on this paper by three economists, in the end, alas, it seems one more effort to show how government either screws up economic things, or exaggerates economic problems in order to justify aggrandizing more power for the state from otherwise well functioning financial and non-financial markets, or will in demagogic fashion even cause a financial panic --- maybe motivated by Sec. of the Treasury Paulson's personal interest in saving Goldman-Sachs --- in order to press a top politician's or top bureaucrat's personal agenda.

The effort doesn't succeed.

2) The analysis Alex relies on seems, to get down to the nitty-gritty,

†¢ Not to distinguish between --- here I follow The Economist’s summary today --- “rates on the highest quality non-financial commercial paper† and those “for lowest quality stuff.† The rates on the former have not jumped recently. That’s not true of the rates for lower quality paper. They have soared recently. And as The Economist further notes, “the spread between the two, actually, is one of Calculated Risk's credit market indicators.† For the Economist article, click here

†¢ To fail, as both an earlier poster in this thread notes and The Economist article, to make sense of the sharp and uncommon spike in bank lending in the flurried period of the financial crisis late last month.

After all, if bank loans were actually flourishing in this period owing to very promising market conditions, now and in the near future, are we to understand (again quoting The Economist’s vigorous wording) “that for most banks, conditions actually improved, suddenly, sharply, and atypically while the rest of the financial world went to hell? “ Or, alternatively, could we estimate that the big rise in bank lending reflected ever severer credit conditions in the rest of the financial world.?


Meaning more specifically that businesses and others were having recourse to credit facilities they wouldn’t ordinarily resort to except when credit wasn’t available elsewhere?

†¢ And to fail even more --- given perhaps Alex’s penchant to salvage his predictions of last winter and his theoretical commitments to libertarian views --- to ignore what the Federal Reserve and the Treasury were striving to do, all with the approval of Congress and the Bush-W (non-socialist) administration: commit several hundred billion dollars worth of taxpayer money to stave off a gigantic collapse in lending to the real economy.


Oh, by the way: If you want some specific data in support of this conclusion, you might click here and see how Mark Thoma at Economist’s View interprets the spike on a day-to-day or week-to-week analysis of events leading up to the recognition --- on a global scale --- that the financial system was nearing a crisis point that, in turn, makes sense in a different way of chart 2B in the paper published by the three economists at the Minneapolis Fed. Reserve Bank. (Click here for Thoma’s analysis.)

Which salvage-effort, moreover, was eventually duplicated in various ways by the EU countries and Japan, along with lots of other governments eventually, all of whom --- if Alex’s logic is followed to its conclusions --- are also full of either rogues, fools, or self-aggrandizing frauds. Not to forget, of course, that the George Brown government in London took the initiative to massively seek to recapitalize the British banking system by directly buying equity shares in it . . . a measure then copied here a few days later and almost every in Europe and elsewhere in the industrial world.

†¢ Finally, as a poster called MG in the Thoma-thread notes: “According to a footnote to the October 10, 2008 FRB release H8, loans by large commercial banks increased in the week ending October 1 solely due to the acquisition of $259 billion in assets from nonbank institutions. This does not appear to be mentioned in the paper cited†.


4) A final question prompts itself here.

Has Alex ever done what Tyler has done here at Marginal Revolution, amid a storm of furious finger-pointing and abuse that followed? Namely: pin the responsibility for our current financial crisis, which is clearly impacting the real economy on numerous indicators, on both governments and financial agents.


Remember here. The current financial havoc is only the latest in a series of upheavals and turmoil in financial markets ever since the Reagan, Bush-Sr, Clinton, and especially Bush-W sustained efforts began in the early 1980s to deregulate those markets or (especially since the start of 2001) to stymie the effective application of what regulations the SEC, the Fed, and other government or non-governmental regulatory agencies still had at their disposal. Not to forget the tripling of national debt in the Reagan 8 years in office. Its steady rise in the Bush-Sr era. And its doubling again in the Bush-W 8 years.

Somehow, tax-cuts that favor especially the very affluent, rich, and super-rich never do what they’re supposed to ---- though no doubt, for the faithful, it’s always due to auxiliary conditions, and not the underlying ideological beliefs behind the cuts.


Michael Gordon, AKA, the buggy professor

Sorry, that should obviously have read "for this to be a controversial part of the paper".

"For a week or two there it was impossible to get a lease on a car or even a lousy $5000 printer from HP even with stellar credit..."

This is the type of BS that has been driving this whole debate. This is absolutely NOT true.

You definitely could get a car loan just at a higher rate.

I was watching CNBC one day during the height of the credit panic and they did a full story on car loans. They complained for 10 minutes about how hard it was to get a car loan, but right at the end they put some number to it and said "Borrowers for car loans are now having to pay as much as 75 basis points more than before!"

Well woopdee frigin doo 75 bips. Financial armageddon is upon us.

Will these higher spreads cause a recession, yes. Will they send us spiraling into depression NO.

And yet we get a huge government intervention into our financial system with the bailout.

We care about quantity wrt crisis. But don't we care about price/rates wrt recession? And, we care about how they affect eacthother wrt discounted future cash flow calculations, right? I.e., if we have a major recession due to high interest rates, then foreclosure rates go up and financial instrument values go down.

"(2) The Fed's Senior Bank Loan Officer survey finds the net percentage of respondents who are tightening lending standards is one of the highest, if not highest, on record for mortgages, C&I loans, and consumer credit."

What is so bad about credit drying up. If we were in a unsustainable speculative bubble than it would be a very healthy response for credit to dry up and for interest rates to increase for risky loans. What exactly is wrong with this? If this crisis was cause by unsustainable practices than why should we expect these practices to continue?

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