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.

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.’

…stochastic calculus porn…

That’s Arnold Kling on the state of modern macroeconomics.

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.

More trouble at Chicago, this time among the econ faculty, regarding the Milton Friedman Institute.  Sad. 

Hat tip to Steve Levitt.

As many people suspected someone was manipulating Intrade to boost John McCain’s stock price:

An internal investigation by the popular online market Intrade has revealed that an investor’s purchases prompted “unusual” price swings that boosted the prediction that Sen. John McCain will become president.

Over the past several weeks, the investor has pushed hundreds of thousands of dollars into one of Intrade’s predictive markets for the presidential election, the company said.

This is big news but not for the reasons that most people think.  Although some manipulation is clearly possible in the short run, the manipulation was already suspected due to differences between Intrade and other prediction markets.  As a result,

According to Intrade bulletin boards and market histories, smaller investors swept in to take advantage of what they saw as price discrepancies caused by the market shifts – quickly returning the Obama and McCain futures prices to their previous value.

This resulted in losses for the investor and profits for the small investors who followed the patterns to take maximum advantage.

This supports Robin Hanson’s and Ryan Oprea’s finding that manipulation can improve (!) prediction markets – the reason is that manipulation offers informed investors a free lunch.  In a stock market, for example, when you buy (thinking the price will rise) someone else is selling (presumably thinking the price will fall) so if you do not have inside information you should not expect an above normal profit from your trade.  But a manipulator sells and buys based on reasons other than expectations and so offers other investors a greater than normal return.  The more manipulation, therefore, the greater the expected profit from betting according to rational expectations.

An even more important lesson is that prediction markets have truly arrived when people think they are worth manipulating.  Notice that the manipulator probably doesn’t care about changing the market prediction per se.  Instead, a manipulator willing to bet hundreds of thousands to change the prediction of a McCain win must think that the prediction will actually affect the outcome.  And if people think prediction markets are this important then can decision markets be far behind?

Hat tip to Paul Krugman.

The Environmental Security Hypothesis says that in tough times men will prefer women who are good at production, generally older, taller, heavier, less curvaceous women with less body fat.  In good times, they will prefer women who are good at reproduction, generally younger, shorter, lighter, more curvaceous women.  Pettijohn and and Jungeberg look at the characteristics of playboy playmates from 1960 to 2000 and find:

Consistent with Environmental Security Hypothesis predictions, when social and economic conditions were difficult, older, heavier, taller Playboy Playmates of the Year with larger waists, smaller eyes, larger waist-to-hip ratios, smaller bust-to-waist ratios, and smaller body mass index values were selected. These results suggest that environmental security may influence perceptions and preferences for women with certain body and facial features.

Econometricians who wish to investigate further may download the data here (yes really).  The 2008 Playmate of the year, Jayde Nicole. does not seem to fit the hypothesis however.

The DOT will begin to auction off landing slots at airports…well at LaGuardia, Newark and JFK anyway…and "up to 10%" of the slots…and with "mounting opposition."  I did say this was a little good news didn’t I?   

Tyler and I have both suggested that increased immigration would help to increase the demand for housing and relieve some of the financial crisis.  Writing in the WSJ Lee Ohanian concurs:

We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices — and the value of subprime obligations — would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.

More generally, Ohanian warns that what made the Great Depression great was the misguided policies that Hoover and Roosevelt adopted to fight the depression.  Ohanian has an ill-considered swipe at Obama on this score but the general point is valid and worth remembering as we rush onwards.