More on the Mythical Credit Crunch
13 December 2008 at 6:28 pm Peter G. Klein 9 comments
| Peter Klein |
The mainstream media finally picks up the meme. From a Reuters story (via Jeff):
* Overall U.S. bank lending is at its highest level ever and has grown during the current financial crisies.
* U.S. commercial bank lending is at record highs and growing particularly fast since May 2007.
* Corporate bond issuance has declined but increased commercial lending has compensated for this.
As for the interbank market, [a new report] says:
* lending hit its highest level ever in September 2008 and remained high in October and that overall interbank lending is up 22 percent since the start of the financial crisis, taken to be mid-2007.
* The cost of interbank lending, as measured by the interest rates banks charge each other for lending overnight Fed funds, dropped to its lowest level ever in early November and remains at very low levels. . . .
[C]onsumer credit . . . was at a record high in September, the latest date for publicly available data. Local government bond issuance had continued at similar levels to those before the credit crisis, while bank lending for real estate reached a record level in October 2008. . . .
All of [this] drove the Celent report to conclude that the U.S. and other governments may be throwing good money after bad for want of a better idea of what is really happening. “Just like a doctor contemplating an obviously sick and suffering patient, a massive surgical intervention based on a misdiagnosis can only worsen the patient’s condition.”
As usual, you read it here first.
Entry filed under: - Klein -, Bailout / Financial Crisis.
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Organizations and Markets 
1.
ckstevenson | 13 December 2008 at 10:53 pm
I’ve been reading about this for months at Marginal Revolution…
2.
Peter Klein | 14 December 2008 at 12:49 am
Marginal who?
By “you read it here first” I wasn’t referring to this post today, but to several we’ve made in recent months, e.g.:
Oh, and yes, MR has been half-right about this.
3.
David Hoopes | 14 December 2008 at 12:51 am
I guess that’s why you said “More” on the so called…..”
4.
aje | 24 December 2008 at 8:13 am
Interest stuff, but Peter, how would you explain things like this:
http://research.stlouisfed.org/fred2/series/EXCRESNS
5.
Peter Klein | 24 December 2008 at 10:34 am
Anthony, in light of the other data we’re discussing, I’m not sure this tells us anything but that the Fed has been pumping massive amounts of new reserves into the banking system. It doesn’t tell us much about what banks are actually lending, relative to the set of profitable lending opportunities. Also note that in October the Fed started paying interest on excess reserves, as well as required reserves (http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm) — exactly the opposite of what you’d expect if the goal is to induce banks to increase lending! Anyway, presumably the banks will lend out these new reserves eventually, they just aren’t doing it yet.
6.
aje | 24 December 2008 at 11:29 am
What I understand it to mean is that the Fed has been pumping a lot of money into the banking system, but banks are sitting on it rather than lending it out.
When you say “relative to the set of profitable lending opportunities” I assume you mean that “OK banks aren’t lending any money out, but given the uncertainty and the fact that they were over exposed this is probably quite sensible”. I understand *why* banks are sitting on reserves, but surely the fact that they *are* implies that there are serious credit constraints??
I could understand an Efficient Markets economist to say that the loans market is clearing, just at interest rates that most businesses can’t afford but i’d be surprised if that was your argument since it implies that the economy isn’t suffering a destruction of real wealth.
Regarding the Fed paying interest on reserves, yes it appears a ludicrous decision. Do you know what the rationale was? And also this intertemporal argument seems to be a clear policy error – the banks will probably start lending it out just as the economy starts to recover, thus creating ridiculous inflation.
I just don’t buy the argument that “there’s nothing to see here, it’s all an elaborate hoax”. The excess reserves chart shows that something extraordinary has happened compared to last year and I’m surprised that so many Austrians are painting it as an illusion. The Austrians I know who are in business all seem to recognise that credit channels have dried up and at the moment cash is king.
7.
Peter Klein | 24 December 2008 at 11:53 am
I don’t deny that something important and unusual is going on, and have never claimed it’s an elaborate hoax. What I deny is that credit markets are “frozen,” that loan markets have “shut down,” that “no one is lending,” etc. Clearly there is a lot of lending going on. Good projects are still getting funded. The fact that banks aren’t (yet) lending their _new_ reserves doesn’t tell us anything about the efficiency with which _existing_ reserves are being distributed.
I also deny that the appropriate remedy is to increase “total lending.” What we want are credit markets in loans are appropriately distributed and priced and credit is allocated to the _right_ borrowers and projects. The aggregate data can’t tell us much about this.
8.
aje | 24 December 2008 at 2:01 pm
If I understand you correctly, you are making an Efficient Markets argument that the credit market is clearing, it’s just that low-quality plans are less likely to be extended credit.
But this isn’t what the Minneapolis Fed paper argued (i.e. that credit is flowing at a greater rate than last year), and it doesn’t contradict the idea that there has been a credit “crunch”.
9. Spredt fægtning - I « Verden fra min altan | 5 January 2009 at 12:55 pm
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