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Source link: http://archive.mises.org/9214/the-great-credit-crunch-hoax-of-2008/

The Great Credit-Crunch Hoax of 2008

January 9, 2009 by

Remember the credit crunch? Of course you do. We’d never seen anything like it, or so the highest financial authorities and their lapdogs in the news media told us — not in a cool, calm, and collected way, either, but in a breathless delivery that suggested imminent economic doom unless the government immediately undertook to “do something.” Which it did, of course, on a scale never before witnessed in US history. FULL ARTICLE

{ 25 comments }

StatusQuoJoe January 9, 2009 at 9:39 am

I think that Celent made similar conclusions with a financial study they recently conducted:

http://www.celent.com/PressReleases/20081210/WhatCreditCrisis.asp

At least in terms of the “apparent” credit crisis….

Michael Hartl January 9, 2009 at 12:58 pm

I’m pretty sure at least half the reason everyone talks about a “credit crunch” is because of alliteration. (I’m only half joking: language is a powerful thing. I bet people would be less protectionist if we spoke of “trade measurements” instead of “trade deficits”.)

JIMB January 9, 2009 at 1:04 pm

Can’t really agree with this.

Credit extinguishment (from default, loan mod, foreclosure, delayed foreclosure) is exceeding new credit creation by a large margin. Debt swap bailouts and expenditures has kept the former credit from imploding, but has not affected the extension of new credit to a substantial degree.

The net effect is a shrinkage of credit. The data for “commercial lending” appears to rely on bank accounting without taking into account non-bank leverage, nor does it account for the shenanigans of bank accounting. That is one reason we are in this mess…

jp January 9, 2009 at 1:26 pm

Prof Higgs: “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…. 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”

I’m not sure you give enough significance to the six month plateau in credit oustanding. If you look at the series TOTBAKR going back to the 70s, and the even longer LOANINV going back to the 40′s, pauses are so rare that one we just saw would seem significant.

http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=LOANINV&s1transformation=log

There are other series that better demonstrate the credit slowdown. The year-over-year % change in TOTALNS, total consumer debt oustanding, is at its lowest point since the early 90s

http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=TOTALNS&s1transformation=pc1

This number is significant because it includes not only commercial bank consumer lending but also that of savings institutions, non-financial lenders, securitization etc.

REALN, mortgage lending at commercial banks, is increasing at its lowest rate since the mid 90s.

http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=REALLN&s1transformation=pc1

Finally, the commercial paper market has collapsed, or at least segments of it have.

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=CP

I would say that there is no overall credit crisis. Only certain portions of the market are facing a crisis, and some just a slow-down. These elements are pulling the aggregate total of commercial debt outstanding down (or upwards at a slower pace), while increased investments in government bonds and commercial/industrial lending are pulling the aggregate up.

Robert A. Meyer January 9, 2009 at 1:39 pm

I’m sure that for anyone foolish enough to consume it, the Credit Crunch Cereal guarantees to rot all of their teeth and cause an early onset of diabetes.

If you believe in liberty, property rights and peace on earth, you have to conclude government is a gigantic hoax and a tragedy of monumental proportions for all except social altruists and liberty violators.

Government is “good” for accomplishing three results.

1. Destroying the lives of innocent citizens by starting and prolonging wars.
2. Destroying the wealth of its citizens through its interventionist schemes.
3. Violating the life, liberty and property of any citizen that has the misfortune to be under its jurisdiction.

Apparently, if governments don’t possess a “legitimate” reason to interfere with the smooth workings of the marketplace—they create hoaxes in order to continue their relentless violations of an individual’s life, liberty and property.

I guarantee that the political establishment and the media will do everything in their power to continue their chicanery—even if it destroys everything that is beautiful, sublime and just. The hoaxing must continue and it must continue to be devilishly effective. They are dedicated to keeping the masses dumb. God forbid the people ever catch on.

Robert January 9, 2009 at 6:57 pm

“Credit extinguishment (from default, loan mod, foreclosure, delayed foreclosure) is exceeding new credit creation by a large margin. Debt swap bailouts and expenditures has kept the former credit from imploding, but has not affected the extension of new credit to a substantial degree.”

Add to that how the banks would lend $1 million to buy a $50,000 house for $1 million, then enter a credit default swap with another bank, then lend the same money out AGAIN for another borrower to buy another house for many times its true worth, then enter ANOTHER credit default swap, and repeat the process over and over and over, and the banks leveraged that loan money by a factor of roughly 500 times. Now those massive loans are being defaulted on left, right, and center, and increasing every day. The banks’ credit default swap partners (pretty much all other banks) are suddenly finding themselves having to pay off on those derivatives that are blowing up like a string of firecrackers. When enough of those loans that a bank insured go bust, the bank is broke. Then all of its credit default swap partners who thought they had insurance against a loan default find out their insurance is worthless, and they take the hits on their own bad loans in addition to the loans they insured by writing credit default swaps. Their losses (and bankruptcies) accelerate, leaving even more banks without the insurance they thought they had against bad loans, and so on. That is what the bailouts are hoping to stop – the massive chain reaction underway where one bank’s failure accelerates the default losses of all other banks and hastens their failures as well. However, the bailout only addresses the bad loans that the banks know about SO FAR. It doesn’t address all the additional loan defaults that continue, and even accelerate as we speak, which continues the chain reaction to meltdown. If the real losses be known, they are around $800 TRILLION, far more than even all the governments of the world combined could possibly come up with, even if they wanted to. There is a very real possibility that virtually all outstanding credit could be wiped out, leaving only the small amount of currency as money supply, and prices will have to fall to the point where people can afford to pay for everything with cash only, in full, at time of sale.

liberty geek January 9, 2009 at 7:03 pm

I bet people would be less protectionist if we spoke of “trade measurements” instead of “trade deficits”.)

The reason we have trade deficits is because of monetary policy, i.e. printing money. If we didn’t print money, exports would have to equal or exceed imports. How else would we pay for the imports?

jason4liberty January 9, 2009 at 7:13 pm

Can’t quote source, but MIses points out that once a credit induced boom is initiated, credit must continue to expand somewhere between linearly and geometrically to stave off the bust. So if what the pundits really mean by “credit crunch” is that the supply of credit did not continue to expand at a rate greater than linear, they are absolutely correct. So if they wanted to be intellectually honest, what they should have said is:

“The rate at which we are stealing the value of your savings has fallen dramatically. This is a crisis for two reasons: First, we (bankers and gov) can now transfer less of the purchasing power of your savings to ourselves, obviously a crisis; second, the gullible whom we have ’til now managed to shear unnoticed will be dramatically affected by our actions, which will increase our need and expense for propaganda – I mean, reporting – to quiet the sheep back down and get back to the business of shearing and … ehm … butchery.”

joebhed January 9, 2009 at 8:05 pm

Glad to see you speaking on behalf of the peasantry here, unusual; and attacking the elite for their credit-crunch shenanigans – without actually somehow blaming the government.
Totally blaming, that is.
To be sure there remains a crunch, be it a debt crunch or a credit crunch is in the eye of the beholder. And you correctly lay out that its consequences remain out in the future.
Crunch!, goes the US economy.
An economic crunch.

You conflate the total commercial bank credit outstanding figure with being a commitment by the Treasury that is obligating US taxpayers.
I think it is rather the private federal reserve bankers that are responsible for the growth in commercial bank ‘credit’.
The Treasury’s obligations on the taxpayer are of a much smaller magnitude during this period.

As you say, being US dollar denominated obligations, this federal reserve private banking largesse leaves a huge potential obligation to the taxpayers.

This leaves me wondering why the present criticism of the wanton destruction of the American economy by the private bankers of the federal reserve is rather subdued.
Something about pulling some kind of hoax.
Again, the eye of the beholder.
Perhaps we need to await those future consequences that you point out are coming.

newson January 10, 2009 at 2:37 am

to joebhed:

http://www.federalreserve.gov/

nb: it’s not .com, and the “private” is more like “opaque” than in the economic sense of the word.

Theirn Scott January 10, 2009 at 7:27 am

Mr. Higgs,

I have a question.

What does the “commercial credit” number represent? Is it the assets available to be loaned out? And if so, how does that availability indicate the absence of a credit crunch? Human action is required for a loan to be consummated beginning with a consumer applying for and a banker agreeing to make the loan. The lack of either results in no loan being issued. Therefore, cannot a credit crunch exist by bankers raising their lending standards? By basically refusing to make loans except for extremely credit worthy customers?

Or is your point simply that the money is available and that the government is suggesting there’s no money to lend. That seems ludicrous in light of the billions given to the financial industry.

My own opinion is all this liquidity injection by the Fed and Treasury is “pushing on a string”. The fact is there’s no one to loan to because there is little demand.

Thank you for the article.

Lucas M. Engelhardt January 10, 2009 at 8:24 am

I think Higgs is absolutely right here. There was no “credit crunch”. “Credit stagnation”, yes. But, that is a different thing. The data suggests that as loans were coming due roughly that same amount of money was being lent out, rather than an increasing amount. Is it harder to get loans in this environment? Sure. If credit had been expanding faster, it would have been easier to get loans.

But, do we really want that? We were handing out home loans to anyone, and surprise! it ends up that not everyone can afford a mortgage, despite the blatant lie that my bank told me. (“If you can afford rent, you can afford a mortgage.” – the problem is that being able to “afford” something is as much about risk as it is about a dollar figure, and homeownership is far more risky than renting, as it is harder to get out of. And the really funny thing – the bank was pushing me to buy a house in the middle of the so-called “credit crunch”.)

But, it’s clear: the credit crunch served its purpose. The financial system is more nationalized now than it was 6 months ago, and many of the financial higher-ups saved themselves from being tarred and feathered by their stockholders.

joebhed January 10, 2009 at 9:15 am

to newsom

I’m not sure I get your point.
Did you get mine?

The “total bank credit outstanding” graph represents the balances of the ‘commercial banks’, which are, by definition, private banking members of the federal reserve system. That is to say, these balances are only related to becoming obligations to the taxpayer by virtue of their (debt/credit) balances being denominated in US dollars – the sole source for repayment of those balances therefore being US citizenry.

They are NOT, as the article on the ‘crunch’ implied, obligations of the Treasury.
As I pointed out, the Treasury’s obligations, whether borrowed from the private federal reserve bankers, or elsewhere, over the period have certainly grown as a result of lunatic government policies resulting in unprecedented Federal deficits, but they are not represented in this chart.

The problem in ALL of this, were we to begin to address it, is the debt-money system, aka fractional reserve banking.
If we want to solve this problem, it’s back to Friedman’s 100 percent reserve and Treasury-issue.
Google, and watch, The Money Masters.
Respectfully.

N. Joseph Potts January 10, 2009 at 9:56 am

Judging crunches by the appearances of graphs like that shown in this article is error-prone. The graph was a display of LEVEL of credit. If a display had been made of CHANGE in credit (month-on-month or even year-on-year), it would have looked much more like a “crunch.”

Separately, the graph displays a “recovery” (resumption of prior trend) that could well have been instigated either by government responses or expectations based on government responses. The article makes no note of this likelihood.

This is not to say that the government responses aren’t (as noted in the article) outrageously larcenous and destructive, nor even that the prior trends themselves may not be similarly characterized.

Gerry Flaychy January 10, 2009 at 6:56 pm

Here is a link to data for all the entire U.S. Loan Market, not only the commercial banks loans.

http://www.loanpricing.com/newsroom_files/press_release_4Q08.htm

“Loan issuance in the U.S. for 2008 came in at only $763.98 billion, which is down 55% from 2007.” Thomson Reuters LPC

Chase Venters January 10, 2009 at 10:16 pm

If growth halts, the Ponzi scheme pops.

newson January 11, 2009 at 12:46 am

joebhed says:
these balances are only related to becoming obligations to the taxpayer by virtue of their (debt/credit) balances being denominated in US dollars – the sole source for repayment of those balances therefore being US citizenry.
They are NOT, as the article on the ‘crunch’ implied, obligations of the Treasury.

i didn’t get this message from the article at all. i read it as the doubling of the fed’s balance sheet (ie the backing for federal reserve notes) over the last year must be interpreted as an attack on the purchasing power of the dollar, as the loans/securities taken on by the fed must be of dubious quality.

as long as the lifeline of the fed is offered to commercial banks, their (paper) losses will continue to be socialized.

newson January 11, 2009 at 1:22 am

oh, and “the money masters” gets a thorough trashing in one of the mises forums:
http://mises.org/Community/forums/t/3868.aspx?PageIndex=1

joebhed January 11, 2009 at 10:50 am

newson -
my apologies for the earlier typo on that.

Of course, I agree regarding the fed’s largesse ending up as socialized losses on the populous.
Again, THAT is the problem – that the private fed has the cartelerie license to issue those $USD debts.

You see the fed as part of the government and their balance-sheet doubling as an act of typical bureaucratic tomfoolery.
I see it as the opposite.
A private banking cartel mortgaging Americ’a future with wanton disregard for the effects on the American people, and, yes, the purchasing power of their money.

After discussing the TOTBKCR chart, the author states:
” that work has now placed US taxpayers on the hook for trillions of dollars of additional Treasury commitments…”.

My major point was that everything in the TOTBKCR chart has nothing to do with the Treasury, with the exception, again, that US taxpayers are ‘on-the-hook” for all $USD-denominated debts.

Regarding the link on the discussion of the Money Masters – forgive me, but I followed Conrad’s roller-coaster dilemma fed by confusing and contradictory explanations of what money is, what ‘securities’ are, who creates what first, and who benefits, and how, and why.

If he ever came to any conclusion, I didn’t see it.

Perhaps the Mises community believe this dialogue is sufficiently behind them, or perhaps not worth the time, but I see it directly in their path.

The message of the AMI and the MoneyMasters is that the Rothchild’s have ever been correct:
“Permit me to create and control the nation’s money and I care not who makes its laws.”

Or which economics textbooks are taught at the business schools.
Respectfully.

Gerry Flaychy January 11, 2009 at 11:39 am

Lets not forget that beside the commercial banks, there are too the investment banks and a lot of financial companies like mortgage lenders and car lenders, and even a great number of individuals, who are lendind money. It is not confine to the commercial banks only.

On time mortgage payer` January 11, 2009 at 12:07 pm

There never was a “Freezing of Credit” or a crisis. My information is that 90% of mortgage borrowers pay on time: 94%Conforming and 85%Non-Conforming. That is more than a super majority. There is and never was a crisis.

The problem is and has always been that several stupid insurance companies issued Credit Default Swaps and faced bankruptcy as they could not pay these off. Of course the holders of these policies were: Goldman Sachs, JP Morgon, Citibank; simply a bunch of Federal Reserve Member banks.

Tony Deden January 12, 2009 at 10:48 am

The government and all of its actions are indeed a giant hoax. However this crisis is not a hoax at all. It is incredibly naive to suggest otherwise.

JIMB January 13, 2009 at 8:04 am

So there wasn’t any loss in bank capital from bad loans? There isn’t a massive (and increasing) foreclosure / default problem even greater than the numbers say (and we’re at 10% of all mortgages defaulting right now without correcting for the facts of loan mod, foreclosure stoppage to prevent a mark-to-market, etc!) ? And what of those Level 3 assets? And what about the “shadow” banking system which increased leverage off-the-chart … that’s data we can’t even see!

Guys, I would expect in an Austrian forum for people to drill down into the numbers. These numbers don’t tell the whole story.

This ** is ** a credit contraction. If you’ve been watching, credit extinguishment is greater than credit creation. The government has propped up the ** firms ** but the credit machine is going in reverse.

Evidence? Look at at reserves. Usually M2 is 60 x reserves. Well, reserves are galloping, but very little new credit is being extended to replace the old credit being lost.

These numbers just don’t tell the story.

C.Jacobs January 14, 2009 at 7:59 am

I find it puzzling still… Certainly Prof. Higgs sheds a new light on the subject for me. It’s not as clear cut as we are often told. Why do the loans not contract more? Because of Inflation perhaps?

Being curious I looked for the data at the European Central Banking:

Compare all of Europe average outstanding loans on commercial bank balance sheets
http://sdw.ecb.europa.eu/browseChart.do?DATASET=0&DATA_TYPE=1&node=2116079&FREQ=M&BS_ITEM=A20&REF_AREA=308&SERIES_KEY=117.BSI.M.U2.N.A.A20.A.1.U2.2210.Z01.E
with just Belgium and Germany for instance:
http://sdw.ecb.europa.eu/browseChart.do?DATASET=0&DATA_TYPE=1&node=2116079&FREQ=M&BS_ITEM=A20&REF_AREA=*MU&SERIES_KEY=117.BSI.M.BE.N.A.A20.A.1.U2.2210.Z01.E&SERIES_KEY=117.BSI.M.DE.N.A.A20.A.1.U2.2210.Z01.EZ01.E
Now compare it with the UK !
http://sdw.ecb.europa.eu/browseChart.do?DATASET=0&DATA_TYPE=1&node=2116079&REF_AREA=*OM&SERIES_KEY=117.BSI.M.GB.N.A.A20.A.1.U6.2210.Z01.E

Gerry Flaychy January 14, 2009 at 7:55 pm

C.Jacobs wrote:“Why do the loans not contract more?”

Loan issuance in the U.S. contracted by 55% in 2008 compared to 2007. Is it not enough?
Reference

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