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Some consensus
Mark Thoma gives us eight credit series from the St. Louis Fed. He is somewhat surprised to discover that all show positive growth over last year. I think most people who have heard talk of the credit crunch would also find this surprising. Let's be clear, however, almost all the series also show declining growth. Let's also be clear that the financial sector is a huge mess. Furthermore, we are in a recession that is likely to get worse especially because growth is declining around the world.
Posted by Alex Tabarrok on October 24, 2008 at 08:41 AM in Economics | Permalink
Comments
Tyler, are you worried?
Did Kahneman quantify how worried we should be by this? Or, do tenured professors have different worries than people without guaranteed jobs?
Posted by: pepe at Oct 24, 2008 8:49:47 AM
Sure, some things are a mess. But what?
One of the consequences of the Bush administration's insistence that things were a mess -- so we needed to invade Iraq NOW, and after 9-11 things were a mess so we needed Gitmo NOW, etc. is that I, and possibly others, have little faith in our government's ability to describe the situation accurately.
The Fed branches have a little more distance / objectivity.
[I do realize this has been a problem with other administrations as well, e.g. LBJ's with the Gulf of Tonkin resolution and the information management of the Vietnam War.]
Posted by: zbicyclist at Oct 24, 2008 9:02:07 AM
I must confess I find this post extremely odd.
You start off by giving interesting information, but then the last part of this post sounds like we're being lectured not to take it seriously. How about giving some other information that might balance out the only information you provide here, if you want to make a case against the conclusions one ought to draw from it?
Posted by: Adam at Oct 24, 2008 9:14:52 AM
geez, happy friday everyone!
Posted by: nate at Oct 24, 2008 9:14:59 AM
Alex,
Year to year is worth noting, but weird things happened to bank credit in September and the beginning of October. You seem to think that credit conditions improved, but why was a most of the net increase in residential and commercial real estate loans (including home equity) and in "other" securities (i.e., not Treasury, agency, mortgage backed, or municipal securities)? I think you are forgetting that there is an interesting story to be explained in bank credit during the latest stage of the crisis.
Frank
Posted by: Frank Howland at Oct 24, 2008 10:06:59 AM
Frank, yes Fed. actions have been extraordinary in recent times and this is having an influence. Do note, however, that people have been talking about the credit crisis/crunch for well over a year.
Posted by: Alex Tabarrok at Oct 24, 2008 10:15:52 AM
Alex,
You started out by referencing the Minnesota article as evidence that things were not so bad. One of their main points was that nothing extraordinary was happening to bank credit in September and October. They didn't notice that something weird was happening. I suspect, but don't have good evidence, that the weird stuff was symptoms of real problems for credit to the non-financial sector. You may be right that changes in bank credit was driven by Fed (or Treasury?) actions. But the mechanism which goes from government actions to for example, banks rapidly increasing home equity loans ($39 billion in one week, Sept 24 to Oct 1, when the biggest monthly change between March and August was $6 billion) would be nice to learn about. I think that focusing on aggregate bank credit alone has two opposite problems:
(1)You ignore the other sources of funds for businesses and individuals.
(2)You ignore the detail of what is going on within bank's assets.
Frank
Posted by: Frank Howland at Oct 24, 2008 10:40:31 AM
Alex,
OK now I'm back solidly in your camp. :) What these graphs show--and the Minn Fed ones did not--is that even the "depressed" year/year growth rates are nothing unusual by historical standards. I think what these newest charts really show is that during the "credit crunch" loan growth slowed to normal levels, whereas it had been growing at very high levels during the boom.
Thus, I will go farther than Alex (I think?) and say the recent shenanigans are bad because (a) they are rewarding politically connected rich people at the expense of taxpayers and (b) they are boosting credit growth back up to the levels during the boom, which everyone says was bad.
To put that last point differently: Right now people are saying, "Why the heck were lending standards so lax during the boom!!" at the same time they are saying, "People are finding it harder to get a loan!!"
Posted by: Bob Murphy at Oct 24, 2008 11:16:31 AM
could it mean that we've got further down to go?
Posted by: dieselm at Oct 24, 2008 12:01:46 PM
Alex,
WTF are you thinking? Don't you know that credit booms and busts disprove the Austrian Business Cycle Theory and that libertarianism is dead again like it died after 9/11 and like it was dead when isolationism failed to keep WMDs out of Iraq.
Posted by: Andrew at Oct 24, 2008 12:47:25 PM
All of this proves that we need a more powerful Fed because the catastrophe occurred when we had a less powerful fed. This also proves once and for all that commodity backed currencies are far more dangerous than fiat currencies...if we hadn't listened to the silly inflationista monetarist a year ago and just kept interest rates low we wouldn't have experienced any of this catastrophe.
Posted by: real economist at Oct 24, 2008 1:36:17 PM
Commenter Bob Murphy has it right: "Right now people are saying, "Why the heck were lending standards so lax during the boom!!" at the same time they are saying, "People are finding it harder to get a loan!!""
Just like people favor both "affordable housing" and "stabilizing the housing market" (at what is still a very high level by historical standards).
Posted by: ZBicyclist at Oct 24, 2008 1:53:45 PM
I look at the first slide in the linked post. The slide is entitled "Commercials and Industrial Loans at All Commercial Banks". Isn't that the slide we are most worried about? After all, we want to make sure that businesses can get loans to continue to support their business activities, thereby enabling them to keep people employed or hire new employees. That chart shows that, even though the year-over-year growth rate has declined slightly since the past few years, the growth rate is still higher than *any point in time in the entire decade of the 1990s*.
So commercial and industrial loans are growing faster than any time in the 1990s, and we're supposed to be in a credit crunch? Really?
Posted by: A.S. at Oct 24, 2008 2:08:51 PM
http://biz.yahoo.com/ap/081024/economy.html
Increased existing home sales proves people are dumping them like hot potatoes!
Posted by: Andrew at Oct 24, 2008 2:14:28 PM
Bob Murphy,
That is exactly what I have been thinking through out this crisis.
Thanks for putting it so succinctly.
Posted by: eccdogg at Oct 24, 2008 2:15:06 PM
I very much agree with Bob and eccdogg.
And thank Andrew for making fun of the Iraq non-sense.
Posted by: aaron at Oct 24, 2008 4:25:40 PM
I very much agree with Bob and eccdogg.
And thank Andrew for making fun of the Iraq non-sense.
Posted by: aaron at Oct 24, 2008 4:25:52 PM
I very much agree with Bob and eccdogg.
And thank Andrew for making fun of the Iraq non-sense.
Posted by: aaron at Oct 24, 2008 4:26:10 PM
Recent delinquency rates on real estate loans are nothing unusual by historical standards, either. You can see the historical delinquency rates going back to 1987, and up to Q2 2008 at http://www.federalreserve.gov/releases/chargeoff/delallsa.htm
In the early 1990s the delinquency rate for commercial banks on loans secured by real estate peaked at 7.5 percent in Q2 1991. It was above 4.2 percent thoughout the years Q1 1987 through Q4 1993. That puts in comforting perspective the fact that the Q2 2008 rate was 4.2 percent. That's the delinquency rate on home and commercial real estate loans combined. For the home mortgage loans taken on their own, the current delinquency rate (4.3%) is higher than the 1990s peak (3.7%) and will probably go higher still. But commentators today should not forget that the banks had loads of damage from commercial real estate in the early 1990s without inducing a systemic panic reaction.
As Alex Tabarrok's lead, I've stopped referring to the situation a "crisis", because the fundamentals are not of crisis proportions, and instead I think of it as a "panic".
Posted by: parviziyi at Oct 24, 2008 4:49:43 PM
LIBOR OIS & TED spreads ended the week down 21% and 27%CP Yields on 90day paper increased to 4.9% on Firday, posting a 14% decrease for the week
5 year spreads on A-rated corporate bond increasing 4.9% and B-rated bonds increased 3.7% for the week.
Posted by: design at Oct 24, 2008 10:37:49 PM
when did a recession come to mean a slow in growth? i thought it was an actual contraction, not a decline in the rate of increase?
Posted by: sdhgst at Oct 25, 2008 1:13:35 AM
I find this discussion of "look how much bank lending there is!" to be a bit naive and unaware of how much lending and credit is NOT captured in any data whatsoever (or at least that I'm aware). One of the most important sources of credit is simply seller credit (or delivery terms). If this is cut off, the purchaser needs to pay in advance and get that money from somewhere (and it may well be from an official lending source that gets captured in the data series). This alone may well be the single largest source, or at least one of the most important sources, of credit in the economy. For anyone who has worked in north america versus emerging markets (for example), it is truly astonishing how much "credit" can be available for small businesses, and how easily it can and is provided by suppliers and distributors.
As another example of this, see John Mauldin's recent (October 11) notes from the frontline of October 11. He states/claims that letter of credit issuance for import/export is virtually frozen. Now, that may be true in some circles. The circumstances I work in show letter of credit usage going UP, not down. Effectively, open export (where the exporter simply takes the risk the importer won't pay) and other less formal forms of "trade finance" are under severe pressure, and largely cut off for many markets. This is forcing importers/exporters that have rarely used L/Cs to start using it (and other more formal documentary credits). At the same time, the usual groups of active trade banks are starting to cut back, leaving fewer players. Some banks that confirm L/Cs are simply not doing so, and others are finding that issuances will simply not be accepted by other players (or at far higher rates). When this info will show up in the data series (if ever) is a mystery to me.
This may even have a relationship to formal lending: importers/exporters may have to put more money up front (as a deposit with their bank, for example), and that money has to come from somewhere - all things being equal, out of their other borrowings.
In short, I think the meme that there's nothing wrong with credit in the economy may be entirely wrong: formal credit may be replacing informal credit and other weird push-through effects. For the real economy, the result may be that they need more credit at the same time it is becoming less available, all while the recorded amounts still look okay.
Posted by: GA at Oct 25, 2008 3:00:56 PM
What are you talking about, parviziyi? The very source you cite shows that delinquency rates on residential loans are at their highest levels ever. And the delinquency rates on commercial loans, while well below historical peaks, are rising quickly. In any case, the point isn't that firms are defaulting on their loans (although they increasingly are), it is that the risk that they will in the future is rightly perceived to be higher.
The fact that *bank* lending hasn't completely collapsed misses the point that much of the existing lending is from firms accessing back-up lines of credit after having been shut out of capital markets. (Some firms are even accessing already authorized lines of credit, even though they don't currently need credit, because they fear those lines being withdrawn.) Taking the latter as given, bank lending would have to rise sharply to offset capital market developments for there not to be a credit crisis. It is this fact--that the charts various people have posted are solely on bank lending--that misses the story.
Posted by: Cdn Expat at Oct 25, 2008 3:03:57 PM
Bank lenders have seen a sharp rise in real estate delinquencies and defaults in recent quarters, and they now extrapolate it to yet higher levels in upcoming quarters. In light of historical experience, that extrapolation is a sensible extrapolation for a couple of upcoming quarters. But at that point, however, the level of defaults on real estate loans (residential and commercial combined) will still not have exceeded the level of the early 1990s or else will have exceeded it only modestly. And it is not sensible right now to extrapolate further.
Here's another way of putting it in perspective. As I said earlier, 4.2 percent was the delinquency rate for real estate loans in Q2 2008, and banks endured a delinquency rate of more than 4.2 percent continuously for the seven whole years 1987 - 1993. Can you imagine that the delinquency level experienced in Q2 2008 could continue every single quarter from now until Q1 2015? I cannot. But if it did happen, the banks' losses would merely be in the vicinity of their 1987 - 1993 losses.
Posted by: parviziyi at Oct 25, 2008 5:21:50 PM
I have to agree with Alex. US stuff doesn't look so dire, with the exception of a few areas (automotive for example.)
Most foreign economies I am not so optimistic about.
Posted by: Jorge Landivar at Oct 26, 2008 6:25:51 AM
