No Analysis, No Data

9 October 2008 at 4:22 pm 5 comments

| Peter Klein |

Earlier I complained that public discussions of the current financial situation are largely devoid of analysis. A recent example: virtually no one has explained why the commercial-paper market is “frozen.” We’re told that even firms with good commercial prospects can’t turn over their short-term notes, leaving them desperately short on working capital. In other words, there is real economic value to be created by extending short-term credit to these firms, but no one is willing to lend. $20 bills on the sidewalk, indeed! Presumably there is some kind of Stiglitz and Weiss (1981) story underlying these claims — banks cannot distinguish good from bad borrowers, so they refuse to lend to anyone — but nobody has bothered to spell it out, or to explain how indiscriminate Fed purchases of commercial paper solves the problem. Ah, well, perhaps to ask for analysis makes one a stuffy and unrealistic fundamentalist.

Bob Higgs notes that not only is the analysis largely absent, the data are wildly inconsistent with the kinds of claims being made.

The Federal Reserve System publishes comprehensive data on commercial paper issuance, commercial paper outstanding, and interest rates on commercial paper. I presume that these data give us a clearer picture of what’s going on in the markets than a covey of hyperventilating Wall Street commentators.

Consider first the interest rates for commercial paper. For the past several weeks, 30-day nonfinancial paper has been going for about 2 percent; 60-day and 90-day loans in this market have required a slightly greater rate of interest. Financial commercial paper has been going for roughly 3 percent, give or take a few tenths of a point, with little difference among the 30-day, 60-day, and 90-day rates.

Given that the rate of inflation at present is greater than 3 percent, and presumably will remain greater than 3 percent for the next three months, these nominal interest rates on commercial paper imply that lenders are actually giving away money to corporations that sell commercial paper — the nominal rates of interest are less than the expected rate of inflation. Is this situation what one expects to see during a “credit crunch”? Hardly.

Many commentators claim, however, that virtually no transactions are occurring in this market. These claims are completely false. For the week that ended October 1, which is the most recent week currently reported, total commercial paper outstanding amounted to $1,607 billion. Yes, this amount was down from the $1,702 billion reported for the previous week, but is a 5.6 percent drop a good reason to panic? If we go back to March 2008, when nobody was talking excitedly about the commercial market’s “freezing up,” we find that the total amount outstanding, on average, was $1,822 billion, or only 13 percent more than last week. In March, the market was working fine; now it’s “locked up.” This sort of hyperbole, with which we are being bombarded hourly around the clock, is totally without a basis in the facts.

Entry filed under: - Klein -, Myths and Realities. Tags: .

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5 Comments Add your own

  • 1. Top Quark  |  10 October 2008 at 2:40 pm

    “Presumably there is some kind of Stiglitz and Weiss (1981) story underlying these claims — banks cannot distinguish good from bad borrowers, so they refuse to lend to anyone”

    You appear to misconstrue the S-W story. That paper suggests that, in the presence of adverse seleciton, banks wil RATION credit, not deny it entirely. At the present, there is no lfow of funds, and banks essentially refuse to lend altogether. There is nothing here about Stiglitz and Wess story.

    If you wany analyiss, inquire after the Community Reinvestment Act modification ordered by Clinton, istituted by Rubin and promulgated since then (1998-1999) by Barnie Frank and Maxine Waters. That is what relaxed the lending standards. (No this is not a political statement, although the latter pair are extreme left Democtrats). Incentives have predictable consequences.

    To be sure, the question how it all started is different from why the problem did nos self-correct. That full answer is still pending, of course. But enotther idiotic “control theory” solution is certainly responsible — the mark-to-market rule, which exacerbated the collapse, as did the absence of savings for a generation.

    The American people wanted a politician-driven economy and they got what they wanter. Now we have received even more of that “remedy of social evils” than even the liberals bargained for.

  • 2. Peter Klein  |  10 October 2008 at 2:58 pm

    Quark, you’re right, I was a too glib in describing the SW credit-rationing model. But of course, if you look at the data, it isn’t true that _banks have completely stopped lending_, which is the story making the rounds. The reality is that lending has slowed, not stopped, which is consistent with rationing. That being said, I’m not claiming that the SW model itself is what (thoughtful) analysts have in mind. My point is that they aren’t telling us what model they have in mind.

  • 3. Top Quark  |  10 October 2008 at 9:33 pm

    “My point is that they aren’t telling us what model they have in mind”

    Your point is well taken. Thanks for your reply.

  • 5. Peter Klein  |  12 October 2008 at 9:20 pm

    Mad Slave, I haven’t done the analysis myself, but the raw data are easy to obtain:

    Take a look at the volume tab. It certainly doesn’t look like a market that is drying up.

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