We have a credit crisis! No one can get credit! We have to solve the credit crisis and get money to those who need it!
How many times have we heard these words in the last few months? We have heard this from experts and we have heard it on the street. We have heard it in editorials and this is one key reason why we need to have the fed explode its balance sheet and we need significant fiscal stimulus.
If there is a credit crisis, then it should be easy to look at the data and see a contraction of credit in the banking sector. There have also been comments that banks in the TARP program have not been lending the money to customers. Again, this should be easy to prove. The Fed data as measured in their H8 reports should show a credit contraction. This credit contraction should certainly be negative if GDP has turned negative.
There is actually a surprising lack of evidence to support these arguments. Look at the latest H8 report and compare the amount of credit extended in December 2007 and the level that exists in December 2008. This data would include the crunch period since September. The numbers do not show a contraction of credit. It actually shows an expansion. Bank credit increased by 8% in the last year. Consumer credit has expanded by over 8%. C&I loans increased by over 10%. Where is the crisis? Who is suffering from this crisis? The credit market is different from other markets in that the allocation is not often rationed only on price but on the quantity side. This is what makes for the crunch, yet the evidence is telling us something different. If you just showed a graph of GDP growth in the last year versus credit expansion, you would argue that the money is flowing to companies and consumers.
Now this may not mean that there is no credit crisis, but we have to be more careful on how we define the extent of the crisis or what we mean by crisis. The amount of credit extended, in some cases, has slowed, but even a slowing of credit expansion does not mean the same as a delevering of credit. Credit is less available for poor quality borrowers which one would expect in a recession. The fear is driving this market even in the face of counter-evidence.
It could just mean that the way that the data is collected is not showing a crisis. If that is the case, and the data concerning credit expansion is wrong then what is the Fed going to about the poor data problem? Who is reporting on these numbers?
A thought provoking piece was done by Minneapolis Fed economists called , “Facts and Myths about the Financial Crisis of 2008”.
They focus on three myths in this crisis which have continued since their paper was written in October 2008. In fact, the myths they discuss have not only continued but are more pronounced. They are:
1. Bank lending to non-financial firms has declined sharply
2. Interbank lending is nonexistent
3. Commercial paper lending has declined sharply and rates have risen to unprecedented levels
In reality, bank lending has increased in the last year. Inter-bank lending is still occurring although it is down over the last year. Commercial paper rates have fallen and are below last year for all categories. The spreads have fallen but are still wide by historical standards, but the absolute levels of rates are lower. CFO’s are paying less on their funds. Non-financial CP outstanding is higher than last year. Financial CP has increased and matches levels from mid-2007. Asset-backed CP has fallen significantly and this is where we have seen large deleveraging and shrinking of credit. What has not been shown by the government is the link between ABS CP and other credit lines and how this has affected many companies.
The Fed has done a good job of helping with the credit problems and they may be the reason for the expansion, but the problem is more complex than what many have suggested and clearer information and data is needed to make new policies.
How many times have we heard these words in the last few months? We have heard this from experts and we have heard it on the street. We have heard it in editorials and this is one key reason why we need to have the fed explode its balance sheet and we need significant fiscal stimulus.
If there is a credit crisis, then it should be easy to look at the data and see a contraction of credit in the banking sector. There have also been comments that banks in the TARP program have not been lending the money to customers. Again, this should be easy to prove. The Fed data as measured in their H8 reports should show a credit contraction. This credit contraction should certainly be negative if GDP has turned negative.
There is actually a surprising lack of evidence to support these arguments. Look at the latest H8 report and compare the amount of credit extended in December 2007 and the level that exists in December 2008. This data would include the crunch period since September. The numbers do not show a contraction of credit. It actually shows an expansion. Bank credit increased by 8% in the last year. Consumer credit has expanded by over 8%. C&I loans increased by over 10%. Where is the crisis? Who is suffering from this crisis? The credit market is different from other markets in that the allocation is not often rationed only on price but on the quantity side. This is what makes for the crunch, yet the evidence is telling us something different. If you just showed a graph of GDP growth in the last year versus credit expansion, you would argue that the money is flowing to companies and consumers.
Now this may not mean that there is no credit crisis, but we have to be more careful on how we define the extent of the crisis or what we mean by crisis. The amount of credit extended, in some cases, has slowed, but even a slowing of credit expansion does not mean the same as a delevering of credit. Credit is less available for poor quality borrowers which one would expect in a recession. The fear is driving this market even in the face of counter-evidence.
It could just mean that the way that the data is collected is not showing a crisis. If that is the case, and the data concerning credit expansion is wrong then what is the Fed going to about the poor data problem? Who is reporting on these numbers?
A thought provoking piece was done by Minneapolis Fed economists called , “Facts and Myths about the Financial Crisis of 2008”.
They focus on three myths in this crisis which have continued since their paper was written in October 2008. In fact, the myths they discuss have not only continued but are more pronounced. They are:
1. Bank lending to non-financial firms has declined sharply
2. Interbank lending is nonexistent
3. Commercial paper lending has declined sharply and rates have risen to unprecedented levels
In reality, bank lending has increased in the last year. Inter-bank lending is still occurring although it is down over the last year. Commercial paper rates have fallen and are below last year for all categories. The spreads have fallen but are still wide by historical standards, but the absolute levels of rates are lower. CFO’s are paying less on their funds. Non-financial CP outstanding is higher than last year. Financial CP has increased and matches levels from mid-2007. Asset-backed CP has fallen significantly and this is where we have seen large deleveraging and shrinking of credit. What has not been shown by the government is the link between ABS CP and other credit lines and how this has affected many companies.
The Fed has done a good job of helping with the credit problems and they may be the reason for the expansion, but the problem is more complex than what many have suggested and clearer information and data is needed to make new policies.
Very interesting, so are you saying there is no credit crisis?
ReplyDeletein any case, check out this idea on change.org to help solve the credit crunch. They seem to think the problem is there and are trying to rally the support to help solve it
http://www.change.org/ideas/view/solving_the_credit_crisis_from_the_bottom_up
There is a credit crunch but it is a decline in the growth of credit. The numbers do not suggest that banks have stopped lending. What I am arguing is that the "talking heads" have not provided a clear picture of the numbers.
ReplyDeleteAdditionally, there is not a good match between what is happening in the H8 report and the flow of funds data. The two Fed data bases are showing very different results. Who is trying to reconcile these numbers?
The credit transmission process is not very clear. Banks are expending credit except for broker-dealers, but there is a credit crunch.The only place where we have seen a strong decrease in credit outstanding is with the ABS commercial paper sector. Was this the mechanism for funding all of the debt?