Probably the most important measure of credit-market conditions is the amount of commercial-bank credit outstanding. These figures show that although the middle part of 2008 does stand out in the long view, it does so not by virtue of credit’s frightening contraction, but only by virtue of its hitting a six-month plateau from April through September.
At no time during that interval, however, did the amount of commercial-bank credit outstanding fall below the amount outstanding at the beginning of the year. In short, credit was actually ample, indeed, at an all-time high; it simply stopped growing as usual for six months, stuck at about $9.4 trillion, while one Wall Streeter after another told NPR that “no money is moving; the credit market is completely shut down” or some such cock-and-bull story.
The Good Doctor (yes, in Economics no less) backs up his claim with a damaging graph of Total Bank Credit (TOTBKCR
), courtesy of the St. Louis Fed.
Now with the recent events still fresh in my mind, this sounded so patently screwy, I had to look into it. Disclaimer: I am not an economist, just a fair-minded independent citizen who takes anything "experts" say with a grain of salt (I know, I know - but I still insist I am NOT a libertarian).
To wit: The issue is not, despite Dr. Higgs' spin, that outstanding bank credit disappeared overnight; the issue is that the sources of NEW credit were rapidly drying up. I guess the Good Doctor doesn't have a mortgage and is probably one of those fortunate souls who pays off his credit cards every month, but most people including commercial businesses don't. The credit markets could completely evaporate and yet it would still take months for his precious chart of OUTSTANDING credit to crash. Take another look at the Good Doctor's chart, cuz this is where the spin is - as he indicates, for nearly all of 2008, the outstanding commercial credit flattened out. In fact, it starts to flatten out just about the time the Fed has said that the current recession started.
Well, that makes sense. GDP falls, businesses stop financing new ventures and capital expenditures and start paying down their debt, er, outstanding commerical credit. But even in a recession, businesses borrow money, often with their own commericial paper. That don't show on the Good Doctor's chart, because he wants you to watch his right hand, not his left. You see, this chart is not the only publication from the St. Louis Fed. In one very recent publication
, they make this extraordinary statement:
To understand what is behind the aggregate figures (on bank lending), we compute two measures of changes in loans ... the flow of credit can be divided into two parts: credit expansion (banks making new or expanding old loans) and credit contraction (banks terminating nonperforming loans). Net bank loan changes are the differences between these two.
The first two quarters of 2008 show sharply decreased expansion and increased contraction, followed by a third-quarter rebound. This pattern is consistent with previous recessions, but luckily not as marked as during the savings and loan crisis of the early 1990s.
It is generally agreed that the U.S. economy’s current financial problems began with heightened uncertainty regarding the quality of certain mortgage-backed securities. It is also generally agreed that these concerns were amplified by, and led to, a virtual collapse of the credit insurance market (italics added) when investors discovered that credit-default insurers likely would be unable to perform on their guarantees. As a result, financial market participants, fearful of exposure to now-uninsurable counterparty risk, sharply reduced lending to others. By this path, a crisis of confidence regarding the solvency of counterparties became a liquidity crisis.
The relevant data is the credit INSURANCE market, not how much old credit is still on the books. And to drive the final nail in the Good Doctor's abode, businesses often finance short term requirements, like payroll and debt servicing, with commercial paper which they sell on the open market - and banks are one of the biggest consumers of that paper. In one month, from mid September to mid October, the cost of financing that short-term paper skyrocketed as the interest rates the banks charge themselves quadrupled
I wish my fresh laundry dried up that quickly; imagine my savings if I didn't have to run the dryer for every load of clothes!
The issue, my Dear Doctor, is that new sources of credit were drying up, or getting too expensive. In other words, if I may presume to instruct the Good Doctor, the credit markets were already fragile from the onset of the recession. When the house of cards fell in on the fraud we called securitzed mortgages, it threatened to drag a slowing economy down the drain. Take another look at your chart Dear Doctor. The spike in outstanding commercial bank credit just after that infusion of funds looks to me like we should be praising, not condemning. Unless you have another explanation for that spike that eludes me.
The Independent calls its newsletter The Lighthouse. Given that this uninspired publication values untenable philosophy over facts, I think The Sirens would be a more accurate description.
Well, libertarians DO believe in caveat emptor, don't they?