This report in today’s Christian Science Monitor is typical of many such reports of late in taking George W. Bush at his word that credit markets are "frozen" and that, without a bailout, the economy will tumble into the abyss.
But read this report carefully and it’s difficult to find evidence in it of any such freezing. Credit markets have tightened, to be sure, but they emphatically are not frozen.
Here are some of my favorite selections from this report:
Not everyone has felt the squeeze yet. Home buyers with good credit can
still get mortgages, although it may require more footwork. The
interest-rate gap between commercial bank lending and Treasury bills
has eased from record levels a few days ago.
(Note the "yet." Why presume that people with good credit will eventually be unable to get mortgages and other lines of market-justified credit?)
And
Nationally, only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago, says Art Spinella, president of CNW Marketing Research in Bandon, Ore.
"Only 63 percent…." This doesn’t seem to me to be anything remotely close to evidence that ordinary Americans are being "frozen" out of access to credit.
And today Toyota announced zero-percent financing on 11 of its models.
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Alan Reynolds offers more evidence that credit is far from frozen.
http://www.cato.org/pub_display.php?pub_id=9685
Alan Reynolds adds more evidence that Bank Loans are not Frozen.
Link to the Cato article, which also can be found at forbes.com
http://snipurl.com/41rn4 [www_cato_org]
Re; "Why presume that people with good credit will eventually be unable to get mortgages and other lines of market-justified credit?"
Exactly. And to take it a step further, why assume that those who are now being denied should have ever been approved? There is no "right" to credit.
Great post! With each passing day it has become clearer that "crisis" has been conjured up to scare Joe six-pack in Middletown, USA into believing that markets are unreliable and politicians MUST intervene lest the "animal spirits" unleashed by the unsupervised, under-regulated pursuit of personal gain break the bank. Rubbish!
When they talk of the credit markets being "frozen", I believe they are referring to the short term and overnight borrowing that many banks and other finance companies use to operate and stay solvent, not consumer credit.
Without the ability to roll over short term debt, as we have seen with Lehman, Fannie, et c.. many banks and finance companies will become insolvent.
snguyen,
"Insolvent" seems like a huge stretch to me. It creates an image of every business in the country closing its doors overnight, and I suspect that is the exactly the image that the promoters of this power grab wish to convey. Does that seem even close to reasonable to you? Because it doesn't to me. To assume that such a thing could actually happen would be to assume that these businesses have no ability to adapt, improvise, overcome – none at all – and that is not my experience. My guess is that most will just end up paying more for credit than they want to pay.
I'd call it journalistic malpractice, but that seems a little redundant.
Randy,
First of all, I never said every business in the country. I referred to businesses that require short term borrowing to fund their operations and pay off creditors. This was prevalent in investment banks, banks and other finance companies.
If a company that has been relying on short term debt to fund operations is not able roll it over and does not have the capital to pay its current creditors then it is essentially, bankrupt barring a restructuring. If the company has to pay a significantly higher short term rate, assuming it can find the funds, it in all likelihood has set in motion a death spiral. What exactly do you think happened to Lehman and Bear Stearns?
A company that is leveraged and relies on short term borrowings simply does not have time to adapt,improvise, or overcome in times where short term funding is not available
snguyen,
First, the figures Don cites are the ones being bandied about to support the claim of a "frozen" credit market. Therefore, it is only reasonable to debunk them.
With regard to the investment banks and finance companies you speak of, do you think we should prop up their questionable business models at taxpayer expense? If so, then what is to stop us from having a steady diet of this sort of crisis every few years into the indefinite future?
My wife just refinanced, I mean in the past 1 1/2 weeks, to get a loan. Obviously not all credit is frozen.
snguyen,
"If the company has to pay a significantly higher short term rate, assuming it can find the funds, it in all likelihood has set in motion a death spiral."
Death spiral? Well, that's dramatic. I can see that a business on the edge might have to close its doors, put its assets up for sale, or declare bankruptcy. A business on the edge.
rpl,
I am not questioning the debunking of figures. I am pointing out that the credit markets encompass a lot more than credit cards, car loans and home buyers. And if some are using the increased difficulty of obtaining a mortgage or car loan as evidence of a frozen credit market then they are mistaken as well. That's not where the danger lies. The danger lies in if 1 or 2 big banks fail, the whole system could collapse.
Do I want to prop up the banks at taxpayer expense? Not particularly. On the other hand, if the system collapses, it won't also be at taxpayer expense? Ultimately it comes down to what you think is the probability and cost of a total collapse.
The banking industry does have these crises every few years. Usually it's in some far off place like Argentina, or Thailand and does not have the ability to cripple the economy. Without onerous regulation(which I am not arguing for), it may not be possible to stop these crises.
@indiana jim
Bingo. Fear and loathing to sell us a stinky bill.
Apparently, the world was too busy slamming Jar-Jar Binks to realize the meaning of The Phantom Menace: create a boogeyman so bad that one can consolidate power that's even scarier.
I'm writing a post about this…
Didn't Murray Rothbard write an essay back in the 1980s about how a gold-backed $ with the right kind of minimal regulation, would prevent all this sort of nonsense?
Flambeaux – Mr. Rothbard didn't realize there were hundreds of billions to be made in being leveraged 30:1. Greed, baby greed!!!!
Just clicked on Yahoo News. Big picture of Nancy Pelosi smiling. This can't be good. And… its not.
Commercial banks don't need to use interbank lending. They can borrow directly from the Federal Reserve.
Investment banks can now do the same.
It isn't exactly "insolvency" that is the problem, but rather default due to illiquidity that is being alleged.
However, some of the firms having trouble borrowing might well be insolvent.
Footwork my ass. I just got a mortgage a few weeks ago, and I hardly lifted a finger.
snguyen,
First, I don't think the evidence that has been presented to argue that we are on the brink of a total collapse is very strong. The reason Don picked the statistics he did to debunk is that they seem to be the best the doomsayers can come up with. I think that if we are going to expect the taxpayers to foot the bill for this nonsense, then we deserve something more than "just trust us, it's bad". That goes double when you consider that every time we have "just trusted" this administration they have bungled whatever we entrusted to them. Moreover, I, for one, just can't get past the conflicts of interest involved. The chief architect of the bailout came from the industry that will receive the largess, and will probably go back there when he leaves? Seriously? We're also hearing rumors that a number of hedge funds were teetering on the brink. How many senators who voted for the bailout held shares in those funds? We will probably never know. For that matter, what argument have any of the bailout's proponents given that this plan will do anything at all to head off the supposed disaster? None that I can see. So many aspects of this whole deal look really shady, and all we're getting in the way of justification is, "ZOMG! We have to pass this bill, or it's teh d00m!" Color me skeptical.
Second, it sounds like you are saying that we can expect the finance industry to continue delivering up these little October Surprises every decade or so forever. In that case, if we accept that an intervention is necessary to avoid disaster, the discussion should center around how to close down these companies in an orderly fashion without taking the rest of the economy with it. If that means propping them up temporarily, then so be it, but it looks to me like we are planning to let them avoid bankruptcy at taxpayer expense so they can get on with the business of planning the next financial crisis ten years down the line. If that's not the definition of "privatized profits and socialized losses," then what is?
The bottom line is, the taxpayers are being scammed here, and it's going to continue until we put our collective foot down and say we've had enough. However, since the apparent outbreak of sanity in the House turned out to be just another shakedown for pork, I guess we'll be having this conversation in another decade or so. See you then.
Oh, you won't have to wait that long.
I'm with Sam. Get used to this story.
The payroll tax surplus peaked this year. The imbalance in the Social Security system is not unique. You've heard for decades that Social Security is a house of cards (because it is), but you haven't heard so loudly that "capital" markets often are too, so your "private savings" aren't really so different.
If we "invested" in Treasury notes rather than paying payroll taxes, would our "private accounts" be any less a house of cards? Of course not. Taxpayers provide the principal and interest on Treasury notes too. The problem is that the number of taxpayers per retiree is now declining rapidly. The decline starts this year.
If we bought houses expecting to rent them to earn our retirement income, would this system avoid the problem? No. This solution is even more hopeless, because housing markets are free … sort of … for now. We can demand sufficient rents from our houses to provide the retirement income we want, but people with options needn't pay the rents we demand. They can build one another new houses instead, and if they can do so for less than the rents we demand, they will, and they should, and I hope they do.
The problem is a shortage of renters willing and able to pay the rents we want, just taxpayers can't provide the Social Security benefits we expect without substantial increases in tax revenue, including the income tax revenue required to "repay the trust fund".
I doubt that a trillion dollars is remotely enough to "solve the problem". The value of outstanding credit default swaps is estimated at fifty trillion. The leverage in our economy now boggles the mind, and it'll only increase, because interest on this leverage is a rent, and our demand for rents is historically unprecedented.
If we're free to reorganize without this leverage, like young people building one another houses to avoid high rents, what happens then? GM is massively leveraged. Why can't people start a new car company without so much leverage?
Because we won't tolerate an economy free enough for it to happen. We value our rents more than we value this freedom.
Martin,
"You've heard for decades that Social Security is a house of cards (because it is), but you haven't heard so loudly that "capital" markets often are too…"
You're absolutely right. In an economy that is controlled and/or manipulated by the state there is no way to avoid political risk. The virtue/wisdom of thrift is replaced by that of political activism.
I doubt that a trillion dollars is remotely enough to "solve the problem".
Why the qualifier? All the money in the world can only buy what is available for purchase.
Let's get "money" out of the equation.
When [consumers > (number of producers X productivity factor)] the standard of living will decline.
This will create pressure to change one of the factors.
Expect SS retirement age to go up.
There will likely be a foreign worker program.
Can't know what to expect regarding the productivity factor.
I better stock up on seed.
I agree, but many of us would risk our spare cash on promissory notes of dubious value regardless of the state in this context, because the problem is demographic. Statesmen are worthy of all the derision you want to heap on them, but if you think this problem is all about the statesmen, you're simply denying your own role in it.
We cry about the state. That's easy. We don't sign our Social Security checks (current and future) over to other people's children right now, since we clearly don't earn them from other people's children. We don't quit our jobs with the state. We don't withdraw our money from FDIC insured bank accounts and risk holding a commodity or real estate at this point. We don't withdraw from pension plans holding Treasury securities or selling a single security to the new Bureau of Financial Stabilization.
We don't do what we could do. We only tell the politicians to stop "making us" do what we do, but no one makes you pretend to "invest" while supporting aging parents who can never return your "investment", so you can demand support of my children through the same pretense later. You willfully swallow this con yourself, because you like the way it feels.
If we had no central bank, no Treasury notes, no FDIC insured accounts, no FNMA, no Social Security "trust fund", no statutory rents of any kind, you'd still find a way to swallow it.
You just sold a bit of your produce profitably, and you dream of consuming without producing decades from now? Hell, I'll sell you a promissory note of dubious value. Hold on a sec. Let me find a pen.
I doubt it. Marginal income taxes will go up to "repay the trust fund", and when the "trust fund" is exhausted, the same stream of tax revenue will continue funding benefits, as was the plan all along.
We may wreck investment this way, but Social Security beneficiaries (and would be beneficiaries) will resist the rise anyway, because they'll refuse to make the connection.
Right. We'll surround ourselves with people who don't share our legal rights but will serve us anyway because they don't have decent rights anywhere else either. One more nail in the coffin of the republic.
How about means testing?
Means testing bothers me less, but it's not my preferred solution.
Do I have to ask?
It's not like I'm a cop here promising to use anything you say against you in a court of law.
If credit markets were frozen, then whey did what amounts to a bidding war by two larger banks for ownership of Wachovia start — prior to the bailout approval?
As was pointed out, for overnight loans, banks have access to the Fed. Besides, it's been alleged by those in favor of the bill, that mortgage, credit card and auto loans wouldn't be available to Main Street. Interestingly enough, I saw a new commercial last night for Toyota offering 0% financing on new auto purchases. They must have access to credit from somewhere.
I'm beginning to wonder if Paulson/Bush & co. concocted this bail out scheme because they expect they can buy securities and make a profit– and use that profit to pay down the debt Bush has incurred faster.
…and i see now I over looked Don's link to Toyota's new 0% financing I mentioned in my post…