Monday, November 17, 2008

Where's the Credit Crunch?It's Sure Not in the Data

Total commercial bank credit at an all-time high of $10 trillion ($10,000,000,000,000)
Total Consumer Credit at an all-time high of $2.6 trillion:
SF Chronicle: Automakers have been hit hard by the economic downturn as consumers put off purchases of big-ticket items, and the credit crunch has made it difficult for would-be buyers to get car loans.

UK Telegraph: The credit crunch has dried up the car loan business.

AP: Instead, Gettelfinger blamed the problems the auto industry is suffering from on things beyond its control — the housing slump, the credit crunch that has made financing a vehicle tough and the 1.2 million jobs that have been lost in the past year.

WSJ: "This industry is in a crisis situation not of its own making," UAW President Mr. Gettelfinger said, blaming the mortgage crisis, credit crunch and financial-sector meltdown for the auto sector's condition.

Update: Thanks to an anonymous comment, see today's WSJ article "Banks Keep Lending, but That Isn't Easing the Crisis."


At 11/17/2008 10:18 AM, Anonymous Anonymous said...

You will find part of the answer here:

At 11/17/2008 11:51 AM, Anonymous Anonymous said...

There isn't a credit crunch just a lack of borrowers who can take on any more debt. They be tapped out and the ones that can don't need the frigging money and are extremely happy to sit and watch prices fall. Also something about having the government take money out of your back pocket, give it to the insolvent banks and then have the gall to expect you to pay them interest to borrow your own frigging money back is kind of irritating to say the least.

At 11/17/2008 12:12 PM, Anonymous Anonymous said...

In the current survey, large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months. The net percentages of respondents that reported tightening standards increased relative to the July survey for both C&I and commercial real estate loans, as did the fractions reporting tightening for all price and nonprice terms on C&I loans. Considerable net fractions of foreign institutions also tightened credit standards and terms on loans to businesses over the past three months. Large fractions of domestic banks reported tightening standards on loans to households over the same period. Demand for loans from both businesses and households at domestic institutions continued to weaken, on net, over the past three months.

At 11/17/2008 1:12 PM, Blogger P 2 said...

just to try and get me head around these figures, isnt a trillion a million million? why not just say that so that mouth breathers such as myself and my nea "leducated" breverin can stay on the page with you.
trillion is a word that is just not doing it for USA.
so a million millionaires time 300 would mean that if the USA had 300 million people we would have a millionaires worth of debt for every American.
and all that debt working against every day is kinda like having blocked arteries on your heart slowly siphoning off your strength.
working against you automatically.
its my understanding that some of the blood the heart pumps goes right back into pumping the pump. We now have to put even more of the body's blood back into the heart just so it can pump.

where are the adults?!!!

At 11/17/2008 1:20 PM, Anonymous Anonymous said...

It's pretty tough to argue with academics with their pretty charts, isn't it.

Well actually not. Why doesn't Carpe Diem chart all the corporate bond issues (securitized or otherwise) for the last decade?

Carpe Diem has no idea as to relative percentages and sources of corporate debt finance.

The doode teaches economics in an MBA program, doesn't he?

The reason he doesn't is that corporate bond issuance has fallen off a cliff and the non-financial sector is relying on revolvers to raise debt capital while the finanial sector sucks at the tit of the TARP (financial bailout).

You see, the nonfinancial sector (the real economy) now wants momma's milk.

I eagerly await buggy's 25000 word essay on the subject.

At 11/17/2008 4:22 PM, Anonymous BARKLEY said...

Why is it that if GPD declines at all it creates such turmoil for so many players in the economy?

I run a business and never have I played so close to the edge that if my sales declined, even a lot, I would be bankrupt.

I have a big cushion for the unexpected.

And it does look like all the really prudent players are going to bail out the prodigal sons

But that is another tale.

At 11/17/2008 5:07 PM, Blogger Marko said...

I have been noticing how whenever anyone points to how difficult it is for consumers to get loans, they never cite any statistics, only anecdotal evidence (like "my aunt couldn't get a car loan!").

Question - is it that there are no statistics kept for consumer loan activity, or that they don't show the supposed Crunch? I suspect the later, since it seems unlikely there aren't publicly available statistics on something so important.

At 11/17/2008 5:17 PM, Blogger Marko said...

What I mean by statistics - what is the percentage of applications verses loans? Has that gone up or down? Are there more applications now? Have the rates gone up? Any other evidence of problems? If not, this scare mongering is a self fulfilling prophecy and people may not be applying for loans because they think they can't get one.

At 11/17/2008 7:25 PM, Blogger the buggy professor said...

1) Well, there are other ways to test for whether a credit-crunch exists or not.


2) In particular, at a good blog run by Professor David Beckworth --- it
s called "Macro and Other Musings" --- he set up a simple model for the money multiplier and found that it had begun to deteriorate markedly in late August of 2008.

Most worryingly, it started declining much more seriously than in the previous recessions of 1990-91 and 2001 (for some reason he also refers to the credit-crisis of Y2K --- a mystery to me).


2)Click here for his model and his very good and brief explanation of what the money-mulitplier.


3) The model.

It's MZM/monetary base

Note the only controversial but persuasive part of the simple model is the use of the numerator "MZM"to stand for money.

It's explained clearly in a linked article of his. The acronymn means "money zero-maturity" --- which is broader than liquid M1.


Beckworth's explanation?

"As noted above, the authors [he's drawing on for the new money-aggregate measure] find MZM to be the appropriate measure of money. MZM is defined as M2 minus small denomination time deposits plus institutional money market mutual funds.

" The main idea behind MZM is that it is an aggregate measure of money that includes all forms of money that can be immediately turned into purchasing power--there are no time restrictions on the money balances. In making the case for MZM the authors go through the list of reasons for the instability of demand for M1 and M2: . . . "

The link to this explanation of MZM --- which takes account of interest-bearing checking accounts and the use of money-market accounts for writing checks, not to forget the use (with some restrictions) of savings accounts for transactions purposes and credit-card use -- is found in the above article by Beckworth.

So be sure to link to that explanation (and to the original work by two other scholars) to decide whether you find the use of MZM as the money-aggregate persuasive.


4) Beckworth's conclusion to his study of the money multiplier is worth quoting here (October 28th, 2008):

" ... These figures indicate banks are sitting on their reserves, and lately there has been a lot of reserve creation by the Fed. These figures may not settle the debate, but they do suggest that we are closer to a systemic credit crunch than to a minor credit market hiccup."


Michael Gordon, AKA, the buggy professor

At 11/19/2008 12:38 AM, Anonymous Michael said...

Dr. Perry the charts you present illustrate the total supply of credit, however, it is the percentage change or the marginal loan we are looking for. It is true that the credit crunch has dwindled and the supply of loans are rising in year-over-year percentage terms recently. Although, the percentage change in loans is significantly lower in percentage terms. Look at from St. Louis Fed.

At 11/19/2008 10:09 AM, Blogger matt said...

Cheers @ anon 1:20. MP, stop denying reality.

I've another chart for you, MP, the
IRX - yield of 3 month T-bills. That is scary. Why oh why has that yield crashed?

At 11/21/2008 2:53 PM, Blogger JOE BILL JONES said...


We the American people can and will, out of desperation take care of this crisis without any government so called help.

If the government put a 6 month freeze on foreign imports, or if they passed a bill that balanced our trade, such as if a foreign country only allows us to send 2 billion dollars worth of goods to their country, then in turn they are allowed to send only 2 billion dollars worth of goods to our country. You know balance the trade!

You and I know this is not going to happen because the rich want a one-world economy and we have a useless congress with a 15 % approval rating. This means that 85 out of 100 Americans think all of congress should be FIRED! We are powerless here.

However Washington, we the little American people have a surprise for you! What you will not do because you are owned and controlled by the lobbyist, we the little American people will do it for you. We definitely don’t need you!

We will stop buying foreign made products and ( you can not stop us ). Within days Wall Mart and others will be full of CHINA AND OTHER COUNTRIES goods that they can’t sell! Within 6 months, millions of good paying American jobs will be created to fill the void with American goods. Again Washington ( you can’t stop us ) !
American little people! I beg you, If it doesn’t say AMERICAN MADE-----DON’T BUY IT! Within 6 months you will have a good job, a good home, be able to pay your bills, and create secure savings! The best thing about this is ( no one can stop us ) .
AMERICAN MADE—AMERICAN MADE—AMERICAN MADE—AMERICAN MADE. Let’s see if this gets Washington’s attention! To Washington, we don’t count!



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