For months Alex Tabarrok has being doing a great job yelling to all the world that this “credit crunch” is bogus. What’s hilarious is that even his critics–see this post by Mark Thoma–rely on evidence that actually proves Alex’s case. I summarize the relevant findings in this blog post. An excerpt:
During the dark days of the credit crunch, when we were warned the entire financial system would collapse if we didn’t cough up $700 billion, the supply of “industrial and commercial loans at all commercial banks” was at an all-time high, and in fact its year/year rate of growth at its lowest point was “only” 12% or so. If you exclude the last few years–which everyone agrees was an insane period with perhaps criminally lax lending standards–then the year/year rate of growth in these loans was higher than at any point going back to the early 1980s. Really, this is amazing, given all the fear-mongering we’ve been hearing.
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Researchers at the Fed Bank of Minneapolis wrote a paper titled “facts and myths about the financial crisis of 2008.” Their findings were that the credit crisis is bogus. It can be found here:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4062
Researchers at the Fed Bank of Minneapolis wrote a paper titled “facts and myths about the financial crisis of 2008.” Their findings were that the credit crisis is bogus. It can be found here:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4062
off the mark, Robert. Did you not view Frank Shostak’s “Pushing on a String” link?
The credit crunch is very real. What is unreal is the Austrian’s parroting on about hyperinflation.
http://mises.org/daily/309
If they mean deflation (decrease in the money supply), when the say “credit crunch” then no there is no credit crunch. The money supply is increasing.
But the other side of the equation, the demand to hold cash (mostly us dollars) is also increasing and currently increasing more than the increase in the money supply.
That is why the dollar is gaining in value against some other currencies and commodities.
FED is pumping cash to the banking system but banks are hoarding the cash because of uncertainty. They dont want to lend out the money because there is a recession coming and they are not sure the credit they give out will be paid back. They don’t want to en up like Lehman Brothers, Countrywide, etc.
And this drives the FED crazy. The FED wants the pumped money to reach the public but it isn’t going anywhere right now. The usual channels are blocked. .
But the money is there. When it is unleashed in the economy, and it will be unleashed make no mistake about it, then we will see the effect which is an unusual rise in price levels.
“But the money is there. When it is unleashed in the economy, and it will be unleashed make no mistake about it, then we will see the effect which is an unusual rise in price levels.”
-see Japan 1989 – present.
@ Eric,
I don’t quite follow your reasoning. Shostak’s “Pushing on a String” link shows that banks are sitting on excess reserves, so obviously there is a “credit crunch” in the sense that they are tightening lending standards. I don’t think anyone is disputing that. What I understood Robert is saying (and someone feel free to correct me if I am wrong) is that the positive rate year-to-year growth rate in real estate loans dispels the myth that the downturn was caused by a lack of credit, and further discredits the attempt to pump money to relieve the “credit crunch”.
Also in Shostak’s post, he points out the massive money pumping by the Fed. Why do you feel that talk of hyperinflation is unreal when we are seeing such expansion of the money supply?
The current crisis has caused currency crises in places like Iceland, Argentina, Russia and even Australia/NZ. A crisis like this seem to make the creditors more wary of their borrowers productivity and their ability to payback, which I think is the reason for the run on these currencies. Why such a run on the currency do not occur in places like Japan or United States?
Eric, what Shostak has been saying for quite some time is that banks will initially sit on their deposits. Why wouldn’t they while the Fed is paying interest on deposits and uncertainty reigns? Eventually, however, banks will no longer be able to ignore ongoing inflation and they’ll begin lending like crazy. That’s when we’ll see prices soar. So, you’re correct in the short-term; but, this is merely the calm (if one can call it that) before the inflationary storm. Here’s an excellent interview with Frank from 9/30/08, where he describes this scenario.
http://media.mises.org/mp3/interviews/Shostak_09-30-2008.mp3
Robert – I have a question.
Why do large companies with a positive cash flow use commercial paper to meet payroll liabilities?
Caveman,
I’ve read probably 70+% of Shostak’s articles over the past 5 years and if you cannot tell that he is a deflationist it’s because you have not been paying attention.
Again, why is nobody responding to the claim that Japan’s money expansion did not cause banks to lend and did not impact the CPI?
Depressions are about debt liquidation.
Some precisions:
1. Following Mr. Lansing, it is true that Japan’s money and credit creation has not flowed into the Japanese economy but mainly sat idle (with near-zero interest rates and no immediate CPI rises there is no real pressure to move it) OR massively flowed into other countries, fuelling bubbles and inflation elsewhere. A perfect example of a beggar-thy-neighbour policy. If all the yen credit moved (something it has not done in 15 years), it would surely be very inflationary. Meanwhile, the unwinding of carry trades and the return of capital flows to Japan is making the yen soar.
2. Argentina has not had a currency crisis yet. It undoubtedly will, but for the moment it has 40bn$ in reserves that must be declining fast. What Argentina has had is a collapse of the stock market and currency pressures (but, again, not a currency crisis yet) after the announcement of a massive confiscation of private pension savings.
If they mean deflation (decrease in the money supply), when the say “credit crunch” then no there is no credit crunch. The money supply is increasing.
But the other side of the equation, the demand to hold cash (mostly us dollars) is also increasing and currently increasing more than the increase in the money supply.
That is why the dollar is gaining in value against some other currencies and commodities.
FED is pumping cash to the banking system but banks are hoarding the cash because of uncertainty. They dont want to lend out the money because there is a recession coming and they are not sure the credit they give out will be paid back. They don’t want to end up like Lehman Brothers, Countrywide, etc. The also can not invest the möney right now. The stock market is outof the question. Treasuary bills already have a negative interest rate so to hold the cash idle is better. Also the dont want to invest in commodities because they think demand from consumers will be decreased because of the recession. Since the money created did not reach the consumers they are right for now.
And this drives the FED crazy. The FED wants the pumped money to reach the public but it isn’t going anywhere right now. The usual channels are blocked. .
But the money is there. When it is unleashed in the economy, and it will be unleashed make no mistake about it, then we will see the effect which is an unusual rise in price levels.
The only way for deflation, decrease in money supply, to happen is to let the banks fail and people who can not get their money out write it off. But they wont let this happen. Claiming there is deflation right now is absurd. Unfortunately some Austrians insist on this absurdity.
“Again, why is nobody responding to the claim that Japan’s money expansion did not cause banks to lend and did not impact the CPI?
Depressions are about debt liquidation.”
Japan is a different story. Saving rate in Japan is very high. And unlike the US they are a creditor nation. Even if the central bank of japan didn’t push the interest rate down, yens interest rate would still be low compared to the dollar. So a 1% interest rate for dollar is not the same as 1% interest rate for the yen. Two nations have different time preferences.
Japan as a nation of savers, supplement the created credit with real savings so the effect is not the same.
In the US people spend more than they have and all the credit that is created out of air will be effecting price level.
But Japan still has other problems. Since the Japanese CB still pushes the interest rate down, capital structure is not as it should be. They are not using their capital as efficient as they can so they cant grow as an economy.
Also government in Japan spends the money on stupid projects and this spending doesn’t effect the price level because they are mostly financed out of savings. But since all government projects are bad investments compared to private investments, the capital is wasted.
US doesn’t have a real pool of savings. So every spending must come from extra created credit.
Checking on the monetary and credit aggregates data of the St Louis Fed (FRED), it would seem that the expansion in credit since 2001 has been very important, but that happened at similar levels in other periods of US history (47-53, more intensely in the great inflation of the 70s, 82-85).
What I suspect is that the data for the most recent cycle are not taking into account large swathes of credit creation from nonbanks (New Century financial, Countrywide, for example) and the “shadow financial system”. Monetary aggregates could have been more inflated than reported in past years, but maybe the credit aggregates including nonbanks would be showing a deeper freeze now.
My view:
M3 has been declining; M1 is shooting through the roof as the FED floods the system with money. The banks do not want to lend because they have no creditworthy customers left. Indeed the FED is pushing on a string and doing exactly the opposite of what they should have done and that is to let the markets play out and solve this as markets do. The $750 billion didn’t stop the crisis. $7.5 trillion won’t solve it. Historically strong holders acquire assets from weak holders in any sell-off or liquidation and the corrections are then relatively short and sharp.
All the FED does by pumping money into the system is to delay the eventual real recovery and a short recession may well be turned into a long depression with more inflation than necessary. In fact when people wake up and really understand what has gone down here, probably stocks and anything real and tangible will soar as people will buy anything real. There isn’t any gold or silver out there for purchase. Kitco, Bank of Nova Scotia and other dealers are out of stock with three month waiting lists. In 40 years of buying/selling gold I’ve never seen anything like it. There is a physical shortage.
I will invest again in “paper” when I am assured an interest rate over and above inflation. Maintaining artificially low rates to “save” the system is illogical. Capitalism depends on savings and deferred consumption, so savings can build up and be re-invested. Trying to kick start another massive round of consumption by consumers already debted out with printed money and more debt is simply ludicrous. It is not the solution. It is the problem.
I recognized Paulsen was an idiot with the first round of stimulus. The nation does not need free money; it needs money that is worth something.
The FED should raise rates. This would encourage savings and speed up the default and cleaning up/liquidation of bad credit. (Yes, it will be tough but that can be accomplished very quickly). Money must have a positive return. If not, it is not money, it is depreciating paper and more and more worthless.
Look at it another way, if gold were worthless, why then is the U.S. holding 8,000 of the 29,000 metric tons in central banks hands worldwide? They have put their paper over on everyone since Nixon defaulted in 1971 and kept the gold. If gold is good for the U.S. government, it is good for me too. Did you know Canada had over 650 metric tons of gold in the fifties in its official reserves? Along came Trudeau (Obama somehow reminds me of him) and he ordered the Bank of Canada to sell it’s gold reserves. Canada has 3 tons today! Less than Guatemala (6 tons).
I would also like to point out there is something fundamentally different this time. It is the first serious recession that the U.S. is going into as a predominantly service economy. The quick rise in unemployment is beginning to stun people. Had it not occurred to anyone that service businesses are the first to get cut in a downturn? A nation of nail and hair salons, massage parlours, restaurants, latte joints, cheap travel and cheap disposable clothes/shoes stores is not one destined to win in the 21st century. Value added manufacturing is essential to the prosperity of any economy. There is a lot of “fluff” in the U.S. economy now and it will be worked out at great pain. I sincerely hope domestic manufacturing of everyday consummables can be resurrected but I am doubtful and therefore believe this downturn may be very prolonged and damaging.
Real money and savings have been destroyed in America…along with a lot of positive common sense values and morals and have been replaced with digital money that seemingly has no root in reality whatsoever. People have become fascinated with cash flow and “can I buy it (whatever it is) using my cash flow”. There is no thought to saving for something. Consumption is almost exclusively financed from debt. Remember, there is no perpetual motion machine.
There is a pervasive corruption in all things political. Neither candidate, McCain or Obama are being honest and laying out the real facts and the difficulties that will have to be overcome to restore American prosperity. It is almost as if we were watching a Hollywood movie where celebrity is more important than substance. When the house is on fire, I want a professional who understands economics and wealth creation. Obama has promised so much and raised the expectations of the less fortunate that come post election they expect a new money tree and all problems instantly solved. Obama has no money tree to shake. McCain, while I respect the man tremendously, just does not have the worldview and economic grounding to return the U.S. to prosperity. Yes, taxes should be kept low but most astounding is the insistence of continuing Iraq. Foreign wars have bankrupted countless empires. Does no one see that? ( Hint: Russia)
Hard work, savings and a new gold backed dollar that cannot be corrupted by politicians are the requirements for a new prosperity. There is no money tree. Nothing is for free. It is time to grow up and not expect the government to shield you from all risk. Take responsibility for yourself. No government domestic or foreign is going to solve this mess. It is up to you.
Buy gold. It is the only widely available monetary commodity and store of wealth that is not someone else’s liability. In the long run you will be way ahead.
Christopher Goodfellow
Christopher,
I certainly agree with what you wrote, but the problem is that our government is an inherently inefficient, wasteful and coercive institution, and like you said, there is a pervasive corruption….
Barring a bunch of Ron Paul clones running for office not much will change.
And the current actions (bailouts and money supply increases) pretty much insure that we will have bigger bubbles and collapses down the road. There is a risk of a Japanese style decade long recession, but given differences between the US and Japan I think we just have bigger boom-bust cycles down the road…
So, its deflation and declining markets for awhile now, then inflation in a year or two, with the start of another financial bubble a couple years out (maybe sooner, its amazing how fast things can change economically these days)….
“So, its deflation and declining markets for awhile now, then inflation in a year or two, with the start of another financial bubble a couple years out (maybe sooner, its amazing how fast things can change economically these days)….”
Looking at books I have yet to purchase on Amazon.com, I’ve seen titles discussing catastrophes in credit and with pensions which are all probably part of the mortgage meltdown.
Please help. I’ve also read an article suggesting that we only escaped the recession in the early 90s with the housing boom but I can’t think where to go looking for it again. Was it on here?
“Treasuary bills already have a negative interest rate so to hold the cash idle is better”
I don’t think this is accurate. Getting some interest is better than nothing, even if the real return is negative. I think the real issue is that banks don’t want to holds treasuries because they are concerned bond prices will drop due to inflation.
I’m am still not clear why we aren’t facing a deflationary period like Japan experienced in the 1990s or the U.S. did during the Great Depression. Thoughts?
AloHa !!
Deflation or inflation is not as important to me as a monetary crisis. Japan and German citizens have savings to fall back on the USA has debt to fall back on. It boils down to a crisis of “confidence” … Once confidence has evaporated what is left? Nothing backs our money except the “faith and credit” of a debt ridden government! COME ON … would you lend the US government money? Quite frankly most of the US Banks couldn’t even qualify for a loan from themselves! If the US Banks were solvent then they would not need TAF would they?
There is no shortage of two things in the USA …
1-Government spending
2-Public debt
You cannot tax what is untaxable … Record foreclosures and unemployment means poverty not wealth. Somehow though here in America we have been convinced that DEBT =WEALTH. That concept is “unwinding” along with the US EMPIRE! Let me point out that while most here follow unemployment via BLS data I follow unemployment via payroll tax withholding charts. The Y/Y drop in payroll tax withholding from 2007 to 2008 is over 75%. That is a double whammy where US corporations have no employees with which to produce revenues and the US government has no taxes with which to maintain current spending and in fact the US government Balance Sheet is loaded up with yet more liabilities, since more unemployment benefits must be paid with a shrinking payroll tax base. This transfers pain to the States like California. If US TAXPAYER are tapped out and the US government will not renege on entitlements and corporate welfare that means only one thing … PRINT MORE DEBT!
I personally have never known my government to do anything but spend, tax and print and I have been alive for over 45 years now. How anyone can tell you that Wars are deflationary is beyond me. Our little incursion into Iraq has already passed the cost of Vietnam and we are fast moving towards exceeding the cost of WW2! Who is the largest single consumer of oil in the World? The US Military is … Now we have COLD WAR 2 going, not to mention our World Police based in 334 countries globally and not to mention the cost of Foreign Aid. US Foreign Policy has failed miserably More people have been bombed by the USA than met Peace Corp volunteers! Is the Peace Corp still viable?
David Walker quit the GAO-US Comptroller General and I liken that to Jeffrey Skilling quitting Enron! Soon after Enron collapsed … The Dallas Fed Gov Fisher estimates the US unfunded liabilities of SS and MED to be closer to $99.2tril. Does the US government renege or monetize debt?
It is no coincidence that baby-boomers are now running government and if anything the ME GENERATION is showing its colors! The number one thing you learned in public schools was peer pressure and IMAGE IS EVERYTHING! Deny you are to blame at all costs! Pres Bush definitely meets that criteria! He essentially manned the Iraq War with volunteers and mercenaries because he and Cheney(two Vietnam draft dodgers)were too spineless to call this a real war and reinstate the draft! Recall that Bush fired Tres Sec Oneill for saying the Iraq War would cost more than $1.78bil, as the official US government estimate! Who was right? Does the US government come in under budget on anything?
Lets get to welfare because there are no bigger welfare addicts than the group of companies that make up the FORTUNE 500 list! US Corporations depend on US government contracts to exist and if the US government is not expanding then US corporate revenues are not expanding either! Without the government the FORTUNE 500 would be more like the FORTUNE 5! How does the US government expand? They grow money out of thin air and call it a bond and they sell that bond and it becomes DEBT! Meaning we are indebted as a NATION to those who hold our bonds. Most of our DEBT is held by countries we were enemies with during the great DOMINO THEORY days and anti-Communist era of the Vietnam War! Remember we defaulted on the gold standard because we went to War in SE Asia so Communism would not spread! That worked out well and 58,000 US kids died for that! Here we are now with a US Tres Sec who is buddy-buddy with the Communists and with good reason … THEY OWN US!!!
Inflation? Deflation? In the end its the MONEY STUPID! When your money is worthless not much else matters. And if you depend on imports like the USA does then when money becomes worthless you are in even deeper doo-doo!
Quit comparing the USA of today with JAPAN … It is like comparing apples to oranges. I will tell you why! Speaking of oranges … In the heart of the so called deflationary spiral in Japan when banks were failing right and left due to bad loans(sound familiar)I met a Japanese lawyer in San Francisco who turned out to be the shipping heir to ITOH Shipping! He and I hit it off and we flew to LA and on the jet flight down to LA he drank copious amounts of orange juice(back then it was free). Every time he finished his cup of orange juice he had the flight attendant bring him another! I asked why he likes orange juice so much? He replied that orange juice is so expensive in Tokyo nobody can afford it! I asked him how much and the little cup he had he claimed it would cost $8USD to buy in Tokyo! And that was back in 1988! On the jet it was free and he went crazy with delight and could not believe it was free! Then he proceeded to tell me everything is very expensive in Tokyo! He also pointed out that everyone in Japan even his family had small houses compared to Americans. Nobody had a four bedroom home with a one acre lot in Tokyo! Isn’t it still inflation when the price does not go up but the quantity/size drops? Who is measuring that aspect of price inflation? Is that the deflation Japan has had? Is it cheap to live in Tokyo today? NO! Yet me, a resident of Hawaii, see Japanese tourists all the time here as if they were rich! How do they afford vacations to Hawaii? The Japanese have much more savings than Americans. The Japanese mentality is much different from Americans. I dare say Japanese know how to suffer better in times of crisis. Americans have never known monetary crisis or real war since WW2! Americans are neophytes when it comes to suffering! The Germans know suffering and so do most of Asia and South America and Africa and East Europe. There are still people alive in Europe who were under Nazi rule! Certainly Russians are experts at suffering! We here in America have been cushioned by our Reserve Currency status and that is why the US government will INFLATE OR DIE before they allow Americans to suffer like Russians did. How long would the two party aristocracy last if we had to suffer a monetary collapse like Russia did in the 1980s? As John Connolly(Tres Sec) said to the Europeans back when Nixon defaulted on gold … :”The dollar is our currency, but it is your problem!”
Do real estate and stocks qualify as money supply? Are mortgages and margin money? What is the definition of what constitutes “money” to be counted as “money supply”? What exactly is deflating? Is it money or bubbles? If commodity prices stay low then supply will shrink because most mining companies and oil producers will not sell off finite supplies without a substantial profit. Substantial profit is needed to fund future exploration in order to replenish supply. I see no abatement in World population, especially in Chindia! Will the Communist be willing to give up their long held power and endure food riots just because the USA is in a recession?
China exports to USA account for 21%, their second biggest country they export to is Hong Kong(themselves) at 18%, then Japan at 9.5%. South Korea and Singapore account for 8% of exports and Europe accounts for 9.9%.
China imports only 7.5% from the USA. and most of their imports are from Asia and Australia at near 58%. So the USA clearly offers very little to China in terms of equitable trade. Obviously the USA takes more than it sends which is why such a large trade deficit exists with China. That deficit is financed with irredeemable debased paper IOUs. Loans paid with loans … The “faith and credit” of the US government! The net trade deficit means that China not only holds US debt that returns negative rates but they also get our inflation as icing on the cake! Now we know what John Connolly really meant by “Its our dollar, but your problem!”
This is the “tribute” the World must pay tp the US EMPIRE. I submit that the US EMPIRE is unwinding … and so is our money!
http://research.stlouisfed.org/fred2/series/AMBSL?cid=124
Can anyone tell me why this graph is so flat all thru the 1920s? This was supposed to be a period of massive credit expansion.
None of the measures of money supply include credit.
Credit dwarfs the money supply. Credit is rapidly disappearing, so (Credit + Money supply) is, in aggregate, rapidly declining.
Why the obsession with money supply?
The other thing about this blog article is that the graphs used are only a very small fraction of global credit. They don’t include “off-balance-sheet” structured vehicles, credit derivatives, etc. etc. They only include commercial banks. Because all these exotic forms of credit are so opaque, I doubt whether anyone can graph them in their entirety. I don’t think there is any serious doubt however that they are declining in historic proportions.
If banks are holding that much money, why are they being bailed out?
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