What Credit Crisis?
For almost the last year (starting in November 2007), I have posted at least ten times (see here, here, here, here, here, here, here, here, here, and here) on the theme "What Credit Crisis?," featuring graphs like the one above, which shows Total Bank Credit at all U.S. commercial banks (data here) at an all-time historical high of almost $10 trillion as of two weeks ago (October 8, 2008). A new working paper from the Minneapolis Federal Reserve, "Myths about the Financial Crisis of 2008," confirms much of what I have been saying for the last year, here is an excerpt:
The financial press and policymakers have made four claims about the nature of the crisis.
1. Bank lending to non-financial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by non-financial corporations has declined sharply and
rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.
Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false.
MP: Commercial loans are at an all-time high (data here) through October 8, consumer loans are at an all-time high through September (data here), and even real estate loans are at an all-time high through September (data here). Where's the credit crisis?
Thanks to Alex Tabarrok at Marginal Revolution.
17 Comments:
...Because it's not a credit crisis, it's a solvency crisis.
This is not the first time I've felt MP's conclusions here are disingenuous.
A measurement of total credit issued is not going to reveal if there's a problem in PAYING THOSE LOANS BACK.
More pertinent indicators: TED spread. - gap between 3 month Libor and treasury bonds showing cost of borrowing to banks
Non Borrowed Reserves - extremely negative - meaning all the reserves banks have are borrowed (on credit!).
Hey matt, thanks for the comment regarding the comment mentioning the TED Spread...
Almost forgot about that little nugget...
"Myths . . . 3. Commercial paper issuance by non-financial corporations has declined sharply . . ."
note the qualification "non-financial". looking at figure 6A in the same FRB paper, the *financial* corp commercial paper market has declined by more than $250 billion in 2008. sort of a 'crisis' in itself, no? this amount more than accounts for the $100 billion increase in C&I loans in 2008, and a large portion of the increase in total commercial bank credit in 2008.
most of the "new" loans showing up as commercial bank credit are just loans being transferred from the commercial paper market to banks.
no new credit.
It is a crisis of confidence. Who do you feel confident about? Treasury? Fed? Banks? Congress?
President(current or upcoming)?
The problem isn't credit, it is the income needed to service the debt and with the government pouring more debt on top of debt this is driving interest rates up for everything other then treasuries and starving the private sectors while at the same time profits and income are falling as unemployment rises. That little 7% drop in the S&P today is trying to tell you something. Psst- it's going a lot lower, like 500. I love academics, Oh that right Bernanakie is an academic also.
It's a great time to be a bum.
I would agree that it's more of a solvency and/or de-leveraging crisis. Amount of credit is not a problem IF you can adequately service the debt.
What credit crisis? Why just look at the balance sheet of the Federal Reserve? Does the Fed, formerly the lender of last resort and now the lender of all resorts, even hold any Treasury bills, notes or bonds? I didn't think so.
It's been one helluva mess since the laissez-faire libertarians let Lehman Brothers go bust.
What Credit Crisis? This credit crisis.
http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db2008103_910602.htm
Well, If at first you do not succeed, try try again.
http://tinyurl.com/5quvxh
Tabarrok's mighty minnie source is already under pushback.
Thank you, Mark, for the link to Alex's post at the Marginal Revolution.
For what it's worth, I left a lengthy commentary in the thread that his post started.
Go here: http://www.marginalrevolution.com/marginalrevolution/2008/10/where-is-the-cr.html
.....
Michael Gordon, AKA, the buggy professor
The loans are real, the problem is the institutions that made the loans which created this fractional reserve nightmare never should have been levered over 10:1 but in fact in many cases the leverage by more the 40:1 especially at the investment banks which have now disappeared and are in the process of de-leveraging. Europe was even worse.
http://research.stlouisfed.org/fred2/series/BORROW?rid=19&soid=1
http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19
Does the Fed statistic capture the brokerage community? That is where most of the losses have occurred - GS, MS, LEH, AIG, etc. AIG alone has had $90B+ in real equity evaporate and that is now official with the LEH CDS settlement. The CDS losses were on assets that were held outside any bank holding company. It was contained at the corporate parent, regulated only by the SEC. If we have lost a trillion in equity (and conservative assumptions on prime, subprime, alt-A and other mortgage loan defaults prove that number easily) then you will notice that the "residual" or equity in the Fed statistics get wiped out. Then turn to the Fed balance sheet and its deterioration with all the stimulus put into non-commercial instruments (i.e. level 3 subprime securities on mortgages - not loans - and subsidized equity investments into banking entities that cannot tap market capital) and you wonder if we are taking a little too much risk with the risk free rate. I agree we have to stimulate, but it had better be right. So far it doesn't look to be, since we have yet to do anything to correct the supply/demand imbalance in housing. More likely we are assuring a longer-term workout that prolongs the agony making it harder for anyone to create wealth in the interim.
When and why did we stop calling these "panics"?
Well, as someone whois actually out there in the market regularly trying to get new business loans, I can tell you the market has dried up almost completely.
I think to get an accurate picture of the situation, you need to chart new loan originations, not just loans outstanding.
One of the things happening right now is that companies are drawing down pre-existing credit lines. In some respects, this is because of the credit crisis, as these lines are not intended to be used as permanent financing. I have heard stories that some companies are drawing their lines pre-emptively because if they wait they don't think the banks will honor their commitments to lend. This is clearly not a rosy picture, but probably shows up as "new debt" in the chart above.
Anyway, I think this is one of those "lies, damn lies, and statistics" issues. Gotta be careful with statistics.
Buggy Prof., Anon.,
Some easy instructions on HTML for posting links.
FYI - most of your links don't work.
In 10 minutes you can to learn how to insert a link using a few simple keystrokes. You can copy the rules to a file to keep handy for copying & pasting as you go.
Your posts can actually look exciting as well as having workable links.
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