Wednesday, February 20, 2008

Collapse of Credit Markets? The Data Suggest Not

Harvard professor Martin Feldstein, writing in today's WSJ:

The principle cause for concern today is the paralysis of the credit markets. Credit is always key to the expansion of the economy. The collapse of confidence in credit markets is now preventing that necessary extension of credit. The decline of credit creation includes not only the banks but also the bond markets, hedge funds, insurance companies and mutual funds.

The dysfunctional character of the credit markets means that a Fed policy of reducing interest rates cannot be as effective in stimulating the economy as it has been in the past. Monetary policy may simply lack traction in the current credit environment.

The collapse of the credit markets began last summer when the subprime mortgage crisis demonstrated that financial risk of all types had been greatly underpriced, that the market prices of complex financial assets overstated their true values, and that the credit scores provided by rating agencies are not to be trusted. Because market participants now lack confidence in asset prices, they are unwilling to buy existing assets, thus preventing current asset owners from providing credit to new borrowers.

Comment: What collapse/paralysis of the credit market? The most up-to-date banking data suggest otherwise.

According to quarterly banking data released yesterday by the Federal Reserve on "end of period levels" through the end of 2007 for all banks, bank credit/loan volume is at an all-time record for all types of credit (business, consumer, real estate)! See charts above, click to enlarge. If there is some paralysis/collapse of the U.S. credit markets, how can bank loan volume be at all-time historical record high levels?


At 2/20/2008 1:58 PM, Anonymous marmico said...

The Office of Thrift Supervision posted sobering news today.

Some snips:

1. Net income was $2.87 billion for the year, down from $15.85 billion in 2006.

2. Profitability, as measured by return on average assets (ROA), was 0.19 percent for the year, down from 1.06 percent in 2006.

3. Troubled assets (noncurrent loans and repossessed assets) were 1.65 percent of assets, up from 1.19 percent in the third quarter and 0.70 percent a year ago.

At 2/20/2008 2:03 PM, Anonymous Kurt Brouwer said...

Excellent point. The problem is that the facts you pointed to do not fit the conventional wisdom that there is a huge credit crunch in banking.

At 2/20/2008 3:40 PM, Anonymous Anonymous said...

Mark, the data you present suggests there should not be reductions in the construction workforce.

Something is wrong with your analysis. Go back and find out why we've seen such a big loss in construction jobs while real estate loans are increasing.

At 2/20/2008 4:13 PM, Anonymous Anonymous said...

With the credit markets froze up companies have no choice but to borrow from the banks, this is not a panacea of health.

At 2/20/2008 5:03 PM, Anonymous Anonymous said...

Bye, Bye, refi

At 2/20/2008 7:17 PM, Blogger juandos said...

"Go back and find out why we've seen such a big loss in construction jobs while real estate loans are increasing"...

Hmmm, is your arm broke so that you can't do it yourself?

Could the fact that when houses were selling for wildly inflated prices there was excess construction of more housing?

As bizzare as it sounds there some seriously optimistic people in the domicile selling game...

At 2/21/2008 1:30 AM, Anonymous Anonymous said...

As interest rates drop, homeowners across the country look at refinancing their mortgages. While brokers and banks have seen a drop in overall loans, applications to refinance are on the rise.

Aha! So mortgage apps are down but refi apps are up as people try to lower their payments and/or pull money out for living expenses.

At 2/21/2008 10:12 PM, Blogger Brandon said...

The Credit crunch is no where near as dire as the liquidity crunch the market is currently experiencing as exemplified via failed auctions consisting of MARS and ARPS of the past week. This is a major problem.


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