Bastiat's Bastions

Many economists have been going back and forth, arguing whether there really was a severe financial crisis that required a massive Federal bailout. I put my initial two cents worth in here.

Now, a new report from the Minnesota Federal Reserve has re-sparked a debate between Alex Tabarrok and Mark Thoma and Tyler Cowen (Joe Weisenthal and Felix Salmon are involved in this too, but, as far as I can tell, they are economic journalists; not that there’s anything wrong with that).

Alex essentially argues (as I have): the question of whether we have a credit crisis revolves around the amount of lending taking place – what quantity of credit is available and who is able to get it. If the majority of both financial and nonfinancial firms cannot raise capital, we have a major crisis (we will quickly lose consumer goods).

Thoma argues (now I’m quoting):

While rates on the highest quality non-financial commercial paper have behaved fairly well in recent weeks, rates for lower quality stuff have soared. The spread between the two, actually, is one of Calculated Risk’s credit market indicators. …we might suspect that the increase in bank lending was itself a product of tight credit conditions elsewhere—that borrowers were falling back onto lines of credit they normally wouldn’t use thanks to the severity of lending conditions.

My translation of Thoma is as follows: The spread between the rates on good and bad commercial paper is out of line, which is an indication of higher risk in the credit markets. Yes, bank lending has gone up, but that’ simply because firms can no longer access non-bank sources of finances (such as commercial paper), so they are using lines of credit they had not previously relied upon.

Although I would like to see more data, I think the Fed paper has some interesting information on the quantity of lending. Here are some highlights (all direct quotes):

– …while commercial paper issued by financial institutions has declined, commercial paper issued by nonfinancial institutions is essentially unchanged during the financial crisis.

- Figures 5A and 5B display data for interbank loans made by all U.S. commercial banks. These Figures show that, at least in the aggregate, interbank lending is healthy.

- bank credit has not declined during the financial crisis.

- Figures 2A and 2B display analogous data for loans and leases made by U.S. commercial banks. Again, we see no evidence of any decline during the financial crisis.

- …no evidence that the financial crisis has affected consumer lending.

- Where are banks obtaining the funds to increase bank credit? The large recent rise in deposits indicates that a substantial amount of these funds is being raised from deposits.

- One story we have heard is the following. The rise in loans is in large part due to nonfinancial firms drawing on their loan commitments and lines of credit and that loans to nonfinancial firms without such commitments have declined. Furthermore, this decline in loans to nonfinancial firms without commitments signals a dramatic future decline in bank lending. Data that support this story, especially data that support the signaling view, would be extremely useful. We have seen no data from the current crisis that support this story, especially the signaling view component of it.

Wow. Unless these Fed employees are trying to sabotage Bernanke and Paulson’s efforts, perhaps someone should listen? At the very least, can we please stop throwing tax dollars at a problem before we can confirm its existence? I’m betting heavily on the negative.

NM

This entry was posted on Thursday, October 23rd, 2008 at 11:12 pm and is filed under Financial, General. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.