Hale Stewart has purportedly written a blog post (reprinted in a bit lengthier form by our friend Barry Ritholtz) in which he refutes the piece by Chari, Christiano, and Kehoe entitled, “Facts and Myths about the Financial Crisis of 2008“. These authors conclude that the following are myths:
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.
Stewart, however, counters:
In fact, a careful reading of each Beige Book from the last year along with a reading of the Federal Reserve’s survey of senior loan officers indicates a drop in loan demand along with a tightening of lending standards throughout the year.
Further he reproduces the following graph of outstanding commercial bank credit:
He then forms two conclusions:
1.) The latest recession is the only recession where total credit outstanding has leveled off for an extended period. (The first recession in the 1980s saw a contraction but only after total credit increased). While it didn’t decrease it also didn’t increase. Compare this to the previous 6 recessions when lending increased at least slightly throughout the recession. In other words, the leveling off of credit creation is a story in and of itself.
2.) In order for the US economy to grow it must have a continual supply of new credit. A leveling off is just as hazardous as a decline.
The conclusions are not supported by the data. To look at the aggregate level of bank lending is misleading. In other words, we are interested in the fluctuations of bank lending, not the aggregate level. There are a variety of factors that cause the upward trend in bank lending since 1973 including the upward trends of GDP, the money supply, and a multitude of others. Further, consider the percentage change from the previous year in bank credit:
The percentage change in bank credit actually seems quite consistent with previous recessions. Further, it is important to note that despite claims by Stewart that credit has leveled off, the percentage change from a year ago is still positive and actually more so that during previous recessions. (It is also important to note that this “leveling off” similarly disappears when the time series is expressed in natural logarithmic form to correct for the growth over time in the variance of the data.)
Stewart further attempts to argue that attempts to explain the expansion of bank lending are given by a recent paper by authors at the Boston Fed:
The Bank of Boston adds other extremely credible explanations for the lack of decline in lending. They note that in a credit crunch companies rely more on their existing lines of credit as other sources of funds (the stock market, commercial paper and new lines of credit) dry up. In addition, banks are unable to securitize loans in the current environment and are therefore forced to keep more loans on their books, thereby increasing lending.
This, however, entirely misses the point. As Casey Mulligan has pointed out with regards to this very study:
The new study does not dispute the increase, but notes its composition: bank customers were drawing on previously established credit lines. While the additional evidence provided is quite useful, please remember that I had already suspected as much. More important, this point about composition in no way refutes the fundamental claim that banks are still lending to many types of customers.
Finally, Stewart concludes that the reason that this debate is even occurring is because (1) the TARP has been a disaster, and (2) there is an anti-Wall Street mood right now. Number (1) is clearly correct, but (2) has little bearing on my opinion nor the opinions of serious economists.
Here are some facts:
1.) The percentage changes from the previous year on a multitude of measures of credit have declined, BUT remain positive.
2.) The decline in percentage increases in credit is consistent and not necessarily as bad as during previous recessions. (See graphs presented here.)
I think that Stewart and I are fundamentally in agreement with regards to the fact that there is a financial crisis. Any time that you have hundreds of firms failing within one single industry, financial stocks that are a mere fraction of their previous value, and an industry that has experienced over $1 trillion dollars in losses, it would be wrong to conclude that this is not an industry in the midst of a crisis. However, it does not follow from the fact that we are in the midst of a financial crisis that we are necessarily in the midst of a credit crisis.