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What does a credit crunch look like?
Maybe Alex is tired of this topic, if so I apologize. But Isaac Sorkin sent me notice of this:
What does a global credit crunch look like when it comes down to raw numbers? A 3% quarterly decline in international banking activity. It doesn't sound like much, but it represents $1.1 trillion--and that was just a snapshot taken at the end of June, before the Lehman Bros. collapse worsened the crisis in interbank lending.
It is also three times bigger than the largest contractions of the past three decades--as long as such records have been kept. After the demise of hedge fund Long-Term Capital Management in 1998, international banking activity fell by 1.2% in the fourth quarter of that year. After the dot-com bubble burst, the contraction was 1%, or $125 billion--chump change compared with today's banking volumes.
The numbers come from the provisional international banking statistics for the second quarter of this year, released Thursday by the Bank for International Settlements, the Basel, Switzerland-based organization that acts as a lender for central banks. BIS says most of the decline was accounted for by "short-term interbank credits in U.S. dollars," i.e., banks not lending to each other overnight--the logjam...we have heard so much about being at the heart of the credit crunch.
Note that is only from the second quarter; we'll see what the third quarter statistics look like. Here is the BIS link. Note that second quarter lending was as robust as it was in part because of continued lending from Europe to Eastern Europe and also to Iceland. That's more reason to worry, not less.
Posted by Tyler Cowen on October 28, 2008 at 01:15 PM in Data Source | Permalink
Comments
A credit crunch is when you can't afford to make hyperlinks render with the same size font as the rest of the text.
So, you convinced me ;-)
Posted by: Person at Oct 28, 2008 1:18:45 PM
Most of the skeptics seem to be skeptical the financial turmoil will affect the real economy to the extent the media and politicians claim it will.
Tyler, you seem to be repeating how bad things are in the financial markets without distinguishing between harm to them and harm to the real economy. As Arnold often points out, we don't have a clear understanding of how the nominal affects the real in this case. I think what you'd need to show your point is data indicating a shortage of credit to credit-worthy firms and individuals outside of the financial sector.
Posted by: Grant at Oct 28, 2008 1:28:46 PM
I've been giving some thought to the Fed statistics. Total credit has expanded during this crunch according to the data. However, if I bought $10,000 in corporate bonds a couple years ago, those bonds are not worth anything close to $10,000 on the open market today. Is the Fed data marked to market? If you did mark the Fed data to market, does the picture change at all? My guess is that if you use the discount that is applied to the bond market, total credit actually has contracted. Otherwise, how is it possible that anyone is defaulting? Why isn't the debt just being rolled over?
Posted by: Nutjob at Oct 28, 2008 1:33:16 PM
I wish that more people would present their arguments with data and not with anecdotes. Oh wait...
Posted by: sd at Oct 28, 2008 1:40:30 PM
This is what a credit crunch looks like:
http://bloomberg.com/apps/news?pid=20601087&sid=a8ynLkcVdr2o&refer=home
Posted by: meter at Oct 28, 2008 1:59:48 PM
Let me just second what Grant said. I am thoroughly convinced that the financial sector has been hammered and that many banks are in bad shape. But that's not the question. The question is whether the "credit crisis" affects _only_ the financial sector or whether it has knock-on effects in the "real world." I can't find any evidence, anecdotal or statistical, that it does.
Posted by: DCreader at Oct 28, 2008 2:14:52 PM
Here are some anecdotes about CFOs who are having their revolving credit lines cut and are losing a source of working capital:
http://www.cfo.com/article.cfm/12294705/c_12323697?f=magazine_featured
Posted by: pytheian at Oct 28, 2008 2:26:45 PM
Since the prices of most things increase with inflation, does not a nearly constant value for loans actually represent decline in real terms. There CPI showed a year over year increase for September of 5%.
Posted by: joan at Oct 28, 2008 2:36:48 PM
A 3% quarterly decline in international banking activity. It doesn't sound like much, but it represents $1.1 trillion--and that was just a snapshot taken at the end of June, before the Lehman Bros. collapse worsened the crisis in interbank lending. After the dot-com bubble burst, the contraction was 1%, or $125 billion--chump change compared with today's banking volumes.
Is there any particular reason that from 2000 to 2008 banking volumes should have grown so much that 2000 numbers look like "chump change?" 3% being $1.1 trillion means that 1% if $367 billion... so volumes nearly tripled (not adjusted for inflation) in eight years. Is that reasonable? Or does that suggest that volumes went too high? I'm certainly not an expert in this.
Posted by: John Thacker at Oct 28, 2008 2:39:46 PM
I'll third Grant and DCreader. I have yet to read any explanation of how the credit crisis on Wall Street leaves Wall Street. It's become a tautology.
When doing a little Googling over the last few weeks I find dozens of credit unions and car dealerships shouting from the rooftops that they have plenty of credit available.
Posted by: Brian Shelley at Oct 28, 2008 2:50:51 PM
Tyler, you should know that the BIS is not a lender for central banks. The IMF is. Once again you quote someone that doesn't know what he's talking about.
Regarding the data, you should know that whatever happens in a particular credit market is not indicative of what happens in all other credit markets. In addition you should know how much double accounting there is in financial statistics. Before checking carefully the reliability and relevance of data, please don't claim anything.
Posted by: E. Barandiaran at Oct 28, 2008 3:05:47 PM
Actually, I think the question now is whether the main street problems will spill over into the credit market.
Posted by: Andrew at Oct 28, 2008 3:25:15 PM
I think Andrew's correct: there will be bleedover from both sides.
Posted by: meter at Oct 28, 2008 3:38:06 PM
if the crisis is forcing banks to switch from originate & distribute to originate & keep then the spike in the bank credit statistics can be perfectly consistent with a crunch, at least in the short run.
Posted by: Martin at Oct 28, 2008 4:01:05 PM
"The most serious financial problem for the Nazi State is not the danger of a breakdown of the currency and banking system, but the growing illiquidity of banks, insurance companies, saving institutions, etc. . . . Germany's financial organizations are again in a situation where their assets which should be kept liquid have become 'frozen'. . . . But the totalitarian State can tighten its control over the whole financial system and appropriate for itself all private funds which are essential for the further existence of a private economy. Yet the institutions which still exist as private enterprises are not allowed to go bankrupt. For an artificial belief in credits and financial obligations has to be maintained in open conflict with realities."
From Gunter Reimann, The Vampire Economy: Doing Business Under Fascism (1939), p. 174, about German economic policy under Hitler.
you guys gave your written support of a fascist "bailout" plan.
Posted by: Gabe at Oct 28, 2008 4:02:31 PM
In response to Gabe's post about fascism:
Thats the way it is now /here/ and /everywhere/. Once a government has the power to control an economy, the usage of such power for political gains becomes far too tempting to not be used.
This is why we *need* to amend the constitution to redefine the commerce clause. Nothing short of a separation of economy and state can suffice to keep us from sliding into some form of socialism.
Posted by: Jorge Landivar at Oct 28, 2008 6:29:33 PM
Gabe: you are the best commenter on the site. Tyler's problem is that he has been drinking too much tap water.
Keep your essence pure...
Posted by: General Jack at Oct 28, 2008 6:41:52 PM
I am with Grant and others.
I do not doubt that many banks are in realy bad shape and that they are not lending as freely to each other.
What I have yet to see is are any severe affects on the real economy or tightening of credit to good borrowers.
Just yesterday I was pre approved for a credit card from WAMU! with a 30k limit and ZERO interest rate until the first of the year.
Posted by: eccdogg at Oct 28, 2008 9:10:22 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 28, 2008 11:06:13 PM
Lots of economists on this site and I respect your call for "data, more data" when debating whether or not we are experiencing a credit crunch. You must admit, "credit crunch" does not appear to be a technical term. It seems to me a bit like "beauty"....
I am not an economist. I am an anecdotalist. I am a banker, have been for 25 years. Let me share my perspective. I provide term loans on stabilized commercial real estate (CRE) in California.
If you came to me a year ago as a seasoned owner/operator of/investor in CRE, I could offer you a deal of 75% LTV (loan to value), 1.25 DSC (debt service coverage), on a 50-unit multifamily property, 200 bps over 5- or 10-year Treasury. The appraisal we would order to establish value could very well have used a 4.5% or 5% cap rate to determine value, vacancy assumption might have been 5%, property located in coastal CA. I have left out a few other assumptions regarding growth in rents, expenses, etc.
Now, come see me today about a loan on this same property. I am perfectly willing to lend you money - no credit crunch from my point of view - I would love to make you a loan. My terms have changed. 65% max LTV, 1.25 DSC is still ok, 300 bps over 5- or 10-year Treasury, 6.5% cap rate, vacancy up a bit from 5%, maybe 7%-10%. Is it clear to you economists what these changes due to the terms of the loan - lower loan amount, higher rate - and the economics of the property? If you were the borrower who knew what loans terms were a year ago, wouldn't you cry "credit crunch".
This is exactly what's happening. Sales of CRE are down 60%+ YoverY as this scenario plays out - sellers unwilling to admit that cap rates are headed higher, economics deteriorating, buyers unwilling to acknowledge that more cash equity needed, need to accept lower returns, etc.
A good proxy for whether or not we are experiencing a credit crunch - the TED spread. The wide bid/ask spread between borrowers and lenders tells us we are expereincing a credit crunch. Let's not forget that it takes two to tango - realistic borrowers and prudent lenders.
Posted by: francois at Oct 29, 2008 12:31:37 AM
Tyler: You're beating a stick against a brick wall. If Alex cannot see a credit crunch in today's market then his beliefs (theories?) are impossible to refute. Facts be dammed. Alex has his beliefs and he's stickin' to 'em.
Alex: I will start reading your posts again the day you eat crow without apology and explain how your extreme ideology has led you astray.
Posted by: mike at Oct 29, 2008 1:19:51 AM
mike, what facts are you talking about? As I see it, there are two claims being made:
1) We are experiencing a credit crunch the likes of which hasn't been seen since the Great Depression.
2) This credit crunch is going to cause a depression in the general economy.
What facts do you have that support these claims?
Posted by: Grant at Oct 29, 2008 3:33:23 AM
If I may, this is what a credit crunch looks like:
http://research.stlouisfed.org/fred2/series/BOGNONBR
Posted by: DOR at Oct 29, 2008 4:49:21 AM
But francios, didn't those standards need to change?
Werem't they too lax before?
If I am going 100 MPH on the highway and see and accident and figure I ought to take my foot off the peddle. Yes that is a slowdown relative to the very high speed I was running at but if I am still going 80 mph or even if I drop down to 65 mph in a 75 zone, it is not like I am going at very slow speeds.
To me compared to historical averages most rates and terms seem very reasonable today. Yes they are more onerous vs were we were over the last 5-years, but not at calamitous levels. Now the TED spread IS at very high levels, but this is reflective of big banks lending to each other not the total financial system lending to the real economy.
Posted by: eccdogg at Oct 29, 2008 9:31:01 AM
From Bank Rate.com http://www.bankrate.com/
NATIONAL OVERNIGHT AVERAGES TODAY +/- LAST WEEK
30 yr fixed mtg 6.31% 6.00%
15 yr fixed mtg 5.94% 5.69%
5/1 ARM 6.09% 6.00%
30 yr fixed jumbo mtg 7.58% 7.46%
5/1 jumbo ARM 6.25% 6.18%
$30K HELOC 5.37% 5.32%
$50K HELOC 5.20% 4.98%
$30K Home Equity Loan 8.28% 8.00%
$50K Home Equity Loan 8.28% 7.72%
$75K Home Equity Loan 8.25% 7.72%
36 month new car loan 6.82% 6.82%
48 month new car loan 6.59% 6.59%
60 month new car loan 6.60% 6.60%
72 month new car loan 6.44% 6.44%
36 month used car loan 7.19% 7.18%
None of that looks too scary to me.
Posted by: eccdogg at Oct 29, 2008 9:37:11 AM
