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Four Myths of the Credit Crisis, Again
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.'
Posted by Alex Tabarrok on October 23, 2008 at 09:05 AM in Economics | Permalink
Comments
there is plenty of data here (and links):
http://www.aleablog.com/credit-crunch-provisional-international-banking-statistics/
from the BIS:
"In the second quarter of 2008, the consolidated international claims of BIS reporting banks on an immediate borrower basis declined by $781 billion (3%). This decline mirrored developments in claims on a locational basis."
Posted by: jck at Oct 23, 2008 9:20:47 AM
Alex Tabarrok, February 2008: "...fundamentally there was no housing bubble" (italics in original)
Alex Tabarrok, October 2008: there is no credit crunch
Posted by: at Oct 23, 2008 9:24:44 AM
the story the media and the commentariat are reporting
========
Why stop there?
At the highest levels of government, we were dished up the urban legend that small companies were on the verge of not making payroll, because of the dry-up in the *Commercial Paper* market.
Posted by: Amicus at Oct 23, 2008 9:28:42 AM
One thing I didn't like about the Minn Fed piece is that they talked about these myths, but did not attribute them to anyone specifically. I think they are setting up straw men.
On the issue of bank credit increasing, it reminds me of the finding that bank credit initially increases after a monetary contraction, but falls in the medium to longer term. In other words, watch this space.
On interbank lending, people paying attention know that it is certain inter bank markets that are frozen. When the rate in the fed funds market is zero, we know that there are some funds out there going cheaply.
Posted by: a student at Oct 23, 2008 9:33:35 AM
More fundamentally, the whole point of a line of credit is to keep credit flowing when one source dries up.
Well sure. But this doesn't mean it can operate indefinitely. To follow to follow the gasoline analogy, suppose there's a hurricane and most shipments of gasoline are cut off to an area. in the short run, at a higher price, I can get gas by drawing on different stocks. If Texaco runs out, I can siphon off the gas from the twenty pickup trucks I have at my company to run the two trucks I actually need. But in the longer run, the solution is to recreate the supply chain that links the area hit by the hurricane to everywhere else.
Posted by: MikeDC at Oct 23, 2008 9:51:02 AM
Alex,
I am with you 99%. However, I have to admit that at that site Tyler linked to, the second graph they analyzed did look pretty compelling. I.e. it did look like the volume of lending tapered off due to the crisis, and then only resumed after all the government shenanigans.
Was that a fair point on their part, or are they distorting what Kehoe et al. are saying?
Posted by: Bob Murphy at Oct 23, 2008 10:13:53 AM
Alex,
I am with you 99%. However, I have to admit that at that site Tyler linked to, the second graph they analyzed did look pretty compelling. I.e. it did look like the volume of lending tapered off due to the crisis, and then only resumed after all the government shenanigans.
Was that a fair point on their part, or are they distorting what Kehoe et al. are saying?
Posted by: Bob Murphy at Oct 23, 2008 10:14:11 AM
Wow--honest to goodness, folks, that is the first time I have ever double-posted on any blog in my entire life. I hit my browser's "Back" button to get back to the MR main page; I never entered in the security code a second time or anything like that.
Now I am less annoyed when other people do it. Be careful: You think it won't happen to you, but no one is safe. There but for the grace of Firefox go I.
Posted by: Bob Murphy at Oct 23, 2008 10:16:17 AM
Of course lending goes up during a credit crisis. Companies tap revolvers when they can't hit the credit markets. Why is this even being discussed? That report doesn't prove or disprove anything.
Posted by: J. Tang at Oct 23, 2008 10:17:32 AM
Bob, sure the Fed. actions have stimulated lending.
Alex
Posted by: Alex Tabarrok at Oct 23, 2008 10:23:34 AM
"One thing I didn't like about the Minn Fed piece is that they talked about these myths, but did not attribute them to anyone specifically. I think they are setting up straw men."
You're saying you have _not_ seen these same claims propagated endlessly throughout domestic and international media? The sources and propagators are vastly too numerous to specifically address. If they're knocking down straw men, they're not of the Fed's making. The fact is these are claims that, true or not, have driven discourse globally, and I'd rather see them addressed in some way than not at all.
Posted by: MM at Oct 23, 2008 10:27:35 AM
Alex:
So what is your explanation for the sudden upward swing in bank credit? If the Minnesota line of thinking is correct, conditions suddenly improved a lot in the last month or so. I bet things actually got much worse.
I suggest that we take a close look at what components of bank credit increased Sept 17 to Oct 8. My source is http://www.federalreserve.gov/releases/h8/current/ (data through Oct. 8).
Total bank credit increased $319 Billion, or 3.3%. (This and the other changes I discuss are all I think fairly large changes.) Of that increase, $157 billion was in real estate loans (home equity lines of credit, mortgages and commercial real estate); this was a 4.3% increase in that category (over 8% for home equity lines of credit).
The other stand out increase: $130 billion in securities (5.1%). Almost all the action was in large domestically chartered banks. (Figures that follow are for those only.) Treasury securities accounted for a $30 billion increase, but most of the jump, $84 billion, came from "other securities." What were those other securities?--all I know is that they aren't treasuries, agencies, state and local, or mortgage backed.
So what was going on? I submit that these rapid changes were symptoms of adverse shocks to the financial system. I could well be wrong--I’d like to hear someone explain what was going on. Thanks!
Posted by: Frank Howland at Oct 23, 2008 10:49:32 AM
From yesterday's Seattle PI
Citing petrified bond markets, the Port of Seattle Commission voted 4-1 Tuesday to use up to $20 million from Sea-Tac Airport's cash reserves to ensure that construction of a $382 million rental car facility continues despite the lack of acceptable customers for the bonds needed to pay for it.
Now I have no idea if this single data point can really be attributed to a credit crunch (are the markets "petrified" as in frozen or "petrified" as in scared due to reasonable fears of receission).
I wonder if some kind of "citizen journalism" might give us insight into this. Do people know of projects cancelled due to a credit crunch specifically? Or does this look like a normal recessionary pullback from where you sit?
I found the "This American Life" piece interviewing the Treasurer of ServiceMaster (Terminix etc) convincing that commercial paper dried up in the wake of the Lehman failure. But again, only one data point.
Posted by: msi at Oct 23, 2008 10:52:54 AM
For a short while, the TED spread and other credit indicators were wading into uncharted waters.
Those indicators have been improving steadily in the past couple of weeks. Does that mean we were at a crisis point? Does that mean that this intervention is the reason it was/may have been averted? I'm not sure we'll ever know.
Posted by: meter at Oct 23, 2008 11:24:28 AM
Alex,
(Sorry I'm repeating what I just posted on Tyler's post, but I want to make sure you see it.) I finally went and read the Fed study; since I had been following your posts all along, I just assumed it was more of the (good) points you had been making.
But even though I was the "credulous blogger" whom the Economist blogger ridiculed, even I thought that Fed paper was useless. Those charts all show lending volume rising like gangbusters for years, and then it completely levels off starting in 2008, and doesn't pick back up until the government's interventions.
So it seems like what happened is that you (quite correctly and fairly) were saying in February, "Hey, lending volume is at all-time highs!" but that what really happened is that growth completely stopped.
At the very least, the Fed authors should have dealt with this subtlety. But after having read the Fed paper, I can totally see why Tyler, Thoma, et al. think it is useless.
Posted by: Bob Murphy at Oct 23, 2008 11:24:41 AM
This is going to sound strange, but when I look into the numbers, I don't see a *huge* crisis in the US. We had banks and investment that were over-leveraged and a few commodity bubbles. This year has been really hard economically, but overall... I see more a panic than a crisis.
If anything, I was more pessimistic about events earlier this year than now.
Seems that Bernanke turned a popping housing bubble into a panic that burst most of the other bubbles (the commodity bubbles in steel, copper, aluminum, oil, etc and the FOREX bubbles in the ISK, CAD, AUD from the carry trade and high commodity prices).
Globally there is more cause for concern, especially if you live in Iceland or one of the countries that got hammered. Iceland's closing of the exchanging of the ISK was particularly worrying and has resulted in some of the trade being moved to much less efficient methods, as Tyler pointed out earlier this week (Maybe we could call it the Classifieds Exchange?).
In short, the drastically reduced commodity prices and increased USD means good news for American domestic manufacturing and for consumers, but US exports will probably suffer. People invested in the over leveraged institutions have suffered, but the stock and bond markets will improve again once the panic is over. Most of the commodity price drops are a result of overproduction more than just decreased demand, so I am optimistic that things will recover nicely within the next year, barring anything absolutely crazy happening (Like someone terminating NAFTA).
Posted by: Jorge Landivar at Oct 23, 2008 11:43:06 AM
Alex,
I was curious about this line of your post
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.
It's been a long time since I took my undergraduate economics courses, but I'm curious as to what happened in terms of simple supply & demand curves. Is the change in price (but not quantity) due to a simultaneous shift in the curves? Or something else. A price-insensitive demand curve?
Certainly I would think that almost any "crunch" can be resolved by a sufficient increase in price. But I wouldn't expect quantity to stay the same for long.
Posted by: msi at Oct 23, 2008 11:45:34 AM
msi, the prices are for a subset of assets/lending. The cited piece puts these into the context of the total quantity of credit.
Posted by: Alex Tabarrok at Oct 23, 2008 11:53:20 AM
Ha, now Greenspan's in the House blathering about the credit crisis.
"Alan Greenspan, the former Federal Reserve chairman told a House panel that the “once-in-a-century credit tsunami” will have a severe impact on the economy."
From what I've read, he's up there pointing fingers at all and sundry while accepting no responsibility whatsoever.
Posted by: meter at Oct 23, 2008 12:07:39 PM
Posted by: Zac at Oct 23, 2008 12:29:08 PM
Some of my favorite arguments in favor of the notion that there is a credit crisis are:
1) There is a credit crisis because the volume of credit and loans available has increased.
This argument is almost too stupid for words. The whole idea of a credit crisis is that banks are UNWILLING to lend to businesses and individuals. To say that the evidence of a credit freeze is the fact that banks are lending more than ever is only valid evidence on bizarro world.
2) An increase in loans doesn’t disprove that there is a credit crisis.
This argument is also valid only on bizarro world. An increase in loans does disprove that banks are not loaning money and hence a credit crisis.
3) The data shows an increase in bank credit, but I believe thing got worse.
Who are you going to believe: your lyin’ eyes that show an increase in bank credit or my gut feeling that things got worse?
4) The volume of lending leveled off and then increased again after the government intervened.
Year-on-year growth in bank credit never got below 5% in 2008 and the year-on-year growth of bank credit started increasing (to its current level of 9.5%) before the government bailout plan was proposed.
Posted by: tom at Oct 23, 2008 1:09:48 PM
Businesses have nothing to fear. A simple solution is the Standby Letter of Credit (SBLC), which is essentially an inexpensive financial product which acts as a bank guarantee. The banks which aren't lending, are still lending if loan backed by a Standby Letter of Credit.
Posted by: Christina Langdon at Oct 23, 2008 1:24:33 PM
I'm not so sure that there is a great difference here. If I read this graph correctly:
http://economistsview.typepad.com/.shared/image.html?/photos/uncategorized/2008/10/22/loansleases.gif
the trend remained level or slightly increased, which everyone agrees happened because of intervention from the Fed.
As to going forward, everyone seems to believe that lending could decrease because of:
1) Lack of funds: Because of credit crisis
2) Lack of demand: Because of the recession
3) Lenders being shell-shocked: Because they're human
There might well not be a great decrease, or other reasons for a decrease, but sorting them out would seem to be complicated.
Anyway, you, Thoma, Kling, Mulligan, Salmon, and Cowen are all favorites of mine, and know a hell of a lot more than me, so I'll wait to read more from all of you.
Posted by: Don the libertarian Democrat at Oct 23, 2008 1:29:59 PM
The Fed bank data linked to above by Frank Howland the balance sheet statement of the entire US banking industry as of 8 Oct 2008, and as of some earlier dates for comparative purposes, with the big banks balance sheet separate from that of the small banks. It's worth looking at. Here's the link again but this time as a PDF file which is considerably easier to read than the ASCII layout that Frank Howland pointed to: http://www.federalreserve.gov/releases/h8/current/h8.pdf.
Posted by: phineas at Oct 23, 2008 4:39:28 PM
a few potential reasons for bank lending (quantity) to be higher in a credit crunch:
1. as already stated, customers draw down on lines of credit to insure they have access to cash
2. commercial paper doesn't roll over, causing cp back up lines to be drawn (typically provided by banks)
3. larger banks running big off-balance sheet books (SIVs, etc.) continue to bring these assets on balance sheet as abcp matures with no prospect of selling new abcp
4. credit card securitizations are not economical (major source of funding credit card portfolios), therefore only alternative is bank funding (bringing the assets back on bal sheet)
as a banker, I can tell you firsthand that credit crunch depends on your point of view - from banker's point of view "What, you don't like the terms we've proposed on your loan - 50% LTV (as opposed to 75% LTV last year), 300 over LIBOR (as opposed to 100 over LIBOR last year)" From borrower's point of view - easy to see that they would yell "credit crunch!"
Posted by: francois at Oct 23, 2008 6:13:14 PM
