Myths About the Financial Crisis of 2008, Minneapolis Fed

Clearly, the United States and the world economy are undergoing a major …nancial
crisis. Interbank borrowing and lending rates have risen to unprecedented levels relative to
U.S. Treasury Bills. Several major …nancial institutions have failed. These real problems
have also been associated with four widely-held myths about the nature of the …nancial crisis
and the associated spillovers to the rest of the economy. The financial press and policymakers
have made four claims about the nature of the crisis.

1. Bank lending to non…nancial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by non…nancial corporations has declined sharply and
rates have risen to unprecedented levels.

4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. At least
based on data up until October 8, 2008, we argue that all four claims are false.

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Where Is The Credit Crunch? III, Alex Tabarrok, Marginal Revolution

Back in February I pointed out that despite all the talk of a credit crunch commercial and industrial loans were at an all-time high and increasing. In September I once again pointed to data showing that bank credit continued to be high (even if growth was slowing.) At that time I also discussed how bank loans were not the only source of funds for business investment and that many substitute bridges exist which transform and transmit savings into investment. I suggested that despite the panic the problems which exist in the financial industry may be relatively confined to that industry.

Three economists at the Federal Reserve Bank of Minneapolis, Chari, Christiano and Kehoe, now further support my analysis pointing to Four Myths about the Financial Crisis of 2008.

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Each of these myths is refuted by widely available financial data from the Federal Reserve. It's a short paper, read the whole thing.

None of this means that everything is cheery. Like most people I think that we are in a recession which is likely to get worse but we need to remind ourselves that recessions are normal. What is not normal is the current level of panic. The panic feels to me like an availability cascade.

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The Credit Crisis Isn't a Myth, Felix Salmon, Market Movers

Joe Wiesenthal points to a new paper from the Minneapolis Fed which seems to show that bank lending's quite healthy. A lot of bank lending is going up, say the authors, and therefore the banking system can't be in as much trouble as people think.

But surely it makes sense that at least at the beginning of a credit crunch, bank lending will go up.

When bond markets shut down, companies are forced to draw down their lines of credit at the bank, since they can't roll over their bonded debt. And those aren't the only credit lines which banks have outstanding: there are also Helocs and credit cards, and the balances on all of those credit instruments are surely rising.

What's more, the authors look at rates rather than spreads, thereby making the credit crunch seem much less bad than it really is. If nominal interest rates stay flat even as the risk-free rate plunges, that's a significant rise in credit spreads, and rate cuts aren't having their desired effect.

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The Analysis!, Free Exchange Blog

IF YOU have been paying attention to the news, to financial experts, to economists—basically to anyone paying attention to financial markets—then you may have heard that there have been some recent problems with interbank lending. In the wake of the Lehman Brothers failure, a number of money market funds broke the buck, and the commercial paper market began to show serious signs of stress. We faced the risk, the experts said, of a breakdown in the markets that helped regular, non-financial companies operate. Had we done nothing, to paraphrase Ben Bernanke, we might have woken up one day to find ourselves without an economy.

Or so they would have you believe, says Alex Tabarrok! For some time now, he has been pushing the argument that we may face recession, but that the financial crisis never threatened the real economy, and so the big government bail-outs were unnecessary. And now he has proof. Three economists from the research department of the Federal Reserve Bank of Minneapolis have produced a working paper purporting to debunk four myths about the financial crisis. Those myths are:

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The authors of the paper next provide a damning analysis. In the best tradition of lazy undergraduates everywhere, they plot lines on graphs and draw wild conclusions. And on the basis of these conclusions, Mr Tabarrok writes his post, and credulous bloggers begin analogising the bail-out to the Bush administration's bogus claims about Iraq's weapons of mass destruction.

There are a few problems with all of this. First of all, some of the conclusions drawn are simply false. 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.

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