Thursday, April 17, 2008

Economic Hysteria

Annual Growth, Commercial Bank Loans, to 4/14/08

Media hysteria over the mortgage crisis is almost certainly misleading countless people about prospects for the real economy.

The focus of the gloomy economic news is on a "credit crisis" or "financial crisis." Yet postwar US financial crises have never resulted in economic disaster. Think of the savings & loan (S&L) crisis of 1986-1995 — a period that also saw Black Monday (Oct. 19, 1987), when Dow stocks fell 22.6%. The S&L crisis lasted from 1986 to 1995, and was undoubtedly the worst US financial crisis since World War II (see chart above of bank failures). Yet the real economy grew by 2.9% a year over that period.

Some papers can't get anything right. An April 6 New York Times piece ("Almost as if The Sky Were Falling," on stock prices) claimed that the "focal point for the stock market's difficulties" is that "banks have been reluctant to lend money to one another, or to anyone else."

If banks were reluctant to lend to "anyone else," then bank loans wouldn't have increased by 8% percent (as Fed data say they have) since last August (and by more than 10% since last year, see chart above), when the mortgage crisis first emerged. The phrases "credit crisis" and "credit crunch" are not about bank loans, as most suppose, but about difficulties in selling or valuing exotic securities.

~Cato Institute's
Alan Reynolds


At 4/17/2008 9:56 AM, Anonymous Anonymous said...

Liberal idiots complaining about the exclusion of bank failure data before 1934 commencing in 3...2...1


At 4/17/2008 10:30 AM, Anonymous Anonymous said...

Bank credit just dropped off a cliff and the Fed Beige Book reports mixed trends in lending activity.

At 4/17/2008 12:29 PM, Anonymous Anonymous said...

How about if we didn't have to bail people out? What would the data look like then? Hey everybody, if you have junk AAA paper, you can go to the Fed and exchange it for treasuries. Woohoo! The government is doing everything possible from using taxpayer money in the case of Bear Stearns to printing money out of thin air (TSLF) to keep market forces at bay.

At 4/17/2008 2:30 PM, Blogger OBloodyHell said...

The sky ISN'T falling?

What will Chicken Little do now?



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