A number of econbloggers are questioning whether the credit crunch is really happening. For example, Alex Tabarrok (here, here and here), Mark Perry (here, here), Peter Klein, (e.g. here and here). Some of their reasoning comes from a paper called Four Myths about the Financial Crisis of 2008, by Chari, Christiano and Kehoe from the Federal Reserve Bank of Minneapolis:
- Bank lending to nonfinancial corporations and individuals has declined sharply.
- Interbank lending is essentially nonexistent.
- Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
- Banks play a large role in channeling funds from savers to borrowers.
Also see a report by Octavio Marenzi at Celent (Reuters story):
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.Bank lending in Britain, tracked from 1999 to October 2008, was at its highest level ever and continued uninterrupted through the credit crisis, the report says
For me the obvious comeback is that these transactions are long term arrangements and are only being honoured due to the massive injections of liquidity that have been made. I can't help feeling that there's a lack of detailed, empirically-based counterfactual analysis. Has anybody provided a coherent and rigorous account of what might have happened without large-scale intervention? That's what is needed.
Regardless, it's one thing to point to FRED series and press articles that link to a report (without any data), but to convince me that the credit crunch is a "myth" I also need to see a refutation of the evidence in its favour. This is the St Louis Fed's series "EXCRESNS, Excess Reserves of Depository Institutions", and shows a pretty dramatic increase in excess reserves at the moment.
In October 2007 banks held onto under $2bn of their reserves, now they're sitting on about $600bn. With the money supply M1 running at over 10% and the Federal Reserve balance sheet looking as it does below (a 140% growth rate), this suggests that banks are literally sitting on money rather than lending it out.
On top of this, commercial paper has contracted by over 20% YOY. (Note: Bloomberg are reporting that "Corporate borrowing in the commercial paper market expanded to the highest level since before Lehman Brothers Holdings Inc.’s bankruptcy filing in September" and according to BusinessWeek "Credit markets are beginning to thaw after months of a deep freeze")
For the UK, the truth must lie somewhere in the balance. Credit markets haven't "dried up", but that doesn't mean that there hasn't been a "credit crunch". For example, at the end of 2008 Lloyds TSB did a £175m deal with Swinton. I've heard plenty of anecdotal evidence regarding financing deals - and yes, when the claim is that the market has "dried up" anecdotal evidence (small cases) is evidence. Here is the Bank of England's data on the growth of consumer credit (Chart 2). The interesting thing though is to look at lending that's secured on dwellings (Chart 1) which has fallen dramatically. The bottom line is that: the bloggers mentioned at the top are wrong - there has been a clear shock to the lending market that has restricted lending; but the mainstream media are also wrong - it hasn't resulted in an across the board cease in lending. It's undeniable that it's harder to borrow money than this time last year, but it's not impossible. Companies and consumers that are in a good position (i.e. a good sector, low debt, decent growth prospects, coherent strategic plan) have access to credit. But there's been a decline in the number of deals across the market as a whole.
The argument that most SMEs are not credit constrained (it's just that they can't pass the market test of being able to afford the market rate of interest) is a compelling critique of the "access to finance" style policies that have gotten us into this situation, but they miss the point as policy responses for the here and now.
There seems that there's two views to take here. The first is an essentially neoclassical Public Choice view - opportunistic policy makers (an alliance between Treasury and central bankers) are exaggerating a recession to (a) spread fear, and (b) capitalise on that fear by seizing greater control of the economy. Capital market are efficient, and the rationally ignorant public are just buying what they're being told. Journalists - who should be holding policymakers to account - are doing what they did during the Iraq war and simply towing the line for fear of alienating the powers that be during a crisis.
The second view is more Austrian - lets assume that Bernanke, Paulson et al are genuinely trying to do the right thing. The problem is they are cognitively constrained (possibly Bernanke's "expertise" is a handicap since it blinkers him to competing views; perhaps Paulson's "experience" makes him overestimate the importance of a vibrant investment banking industry) and they are having to implement policy in real time. Thus policy error becomes self-propagating and the unintended consequences of planning leads us to less and less coordination. These policy errors (and the regime uncertainty being created) are making entrepreneurial decision-making even harder than normal, leading to misallocations of capital and a destruction of real wealth.
You might argue that these two views are complementary. But the most obvious reason why someone might hold both positions is their common policy goals. Strategically, I can see why someone would claim that both positions are true. But theoretically, aren't they alternative hypotheses?