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Is there a credit crunch?
Here is a good piece rebutting the Minneapolis Fed study. One point made is this:
...there is the inconvenient matter that the Federal Reserve and the Treasury went out and did all that stuff they did in order to prevent a massive breakdown in lending to the real economy. ... Now this does allow sceptics to say, "Well, how do we know things would have collapsed"? We don't, of course, but that doesn't change the fact that current lending takes into account massive government intervention to make sure that lending continued. The latter therefore can't be used to argue that the former wasn't necessary.
On these questions I am more of a pessimist than is Alex.
Posted by Tyler Cowen on October 23, 2008 at 07:36 AM in Web/Tech | Permalink
Comments
Yes the Fed did some stuff and that stuff was working to keep rates to good creditors reasonable.
But since the other things were working why did we need a giant bailout?
The bailout seems to me less driven by trying to avoid a terrible financial failure and more to avoid a recession and get lending "Back to normal".
The problem is that normal was at ridiculously loose credit standards. Spreads have been rising, but they SHOULD be rising. Some institutions/people don't deserve the credit they were given.
If a portion of our economic growth over the last 3-5 years was driven by this loose credit then we are going to have to give some of the growth that was created by building worthless houses back.
Posted by: eccdogg at Oct 23, 2008 8:39:58 AM
Hey, that's the beauty of the current intervention. No one can argue that it wasn't necessary. Tracks nicely covered up.
Posted by: Rich Berger at Oct 23, 2008 8:40:17 AM
Have you seen an English version of Samuelson's editorial "The seven errors of liberalism without rules."
Posted by: Harwood Schaffer at Oct 23, 2008 9:16:05 AM
Fine, Tyler. You look at the data with a pessimistic eye; Alex looks at it with an optimistic one.
Is anyone out there interested in finding out the truth of the matter?
Most of what I have read on this subject is blatant axe-grinding and speculation, colored by the tint of the lenses the perpetrator is wearing. "Yes, but if this happens, and this, then ..."
I suggest a good start would be systematically surveying a broad cross-section of actual non-financial businesses to see which, if any of them, are being affected by this putative credit rationing. Grad students? Bueller? Anyone?
Posted by: The Epicurean Dealmaker at Oct 23, 2008 10:17:57 AM
We have direct data on credit conditions. The Fed's Senior Bank Loan Officer survey, taken every quarter, asks if banks are tightening or easing lending standards. The net percentage of those who say they are tightening lending standards has soared in the past year, is close to record highs, and are near levels commonly associated with prior credit crunches and recessions.
If banks say they are tightening lending standards, why don't you want to believe them?
The National Federation of Independent Businesses conducts a monthly survey of its members, which are small businesses. The net percentage who say credit is harder to get has soared in the past 18 months to the highest since the 1990-91 recession. Why not believe them?
Posted by: B.H. at Oct 23, 2008 11:04:15 AM
Yeah, I have been a big fan of Alex on this stuff, but I have finally read the Fed paper (I didn't have time yesterday) and, I have to side with the Economist.com critique. On the face of it, those graphs all seem to support the claim that there was a serious restriction in credit markets starting in 2008. At the very least, things that all had been growing like gangbusters for years, stopped on a dime in 2008.
Posted by: Bob Murphy at Oct 23, 2008 11:19:19 AM
I think we need to separate two things.
1) Is credit tighter than it was when you could buy a house with zero down and no proof of income.
2) Is credit so tight that it is threatening to throw us into another great depression and we must take huge steps (700 Bn bailout) to stop it.
The answer to 1 is obviously yes.
IMO the answer to 2 is obviosly no.
The rates that good borrowers could get just never got to crazy levels. The spreads may have, but the Fed has been keeping rates low so the total cost of borrowing did not go up too much.
Posted by: eccdogg at Oct 23, 2008 11:43:17 AM
It is my understanding that Goldman Sachs, and Morgan Stanley were not commercial banks until they became bank holding companies and only when Merrill Lynch was taken over by Bank of America would their assets and loans be added to commercial bank aggregate numbers. This would account for the strange behavior in the aggregates in September. It is hard to believe that people who work for the fed would not take this into account, so maybe I am mistaken about what is meant by a commercial bank.
Posted by: joan at Oct 23, 2008 11:51:37 AM
Tyler.... you're such a crisis snob.
Posted by: Dave at Oct 23, 2008 1:29:14 PM
Tyler, you're not pessimist. You just invested too much into the credit crunch. Like Chamberlain invested too much into peace. It's not that he's stupid.
Posted by: Cowcup at Oct 23, 2008 6:25:31 PM
