Alex (and others) have been debating whether there’s a credit crunch. They are using data and anecdotes to measure whether credit is flowing or not.
I think what people are missing (or at least I haven’t noticed) is that both borrowers and lenders are dramatically less interested in lending and borrowing. Think of it as the supply and demand curves moving leftward. Lenders are nervous about most borrowers ability to pay. Borrowers are worried about that too. So not surprisingly, there isn’t a lot of borrowing and lending going on at either the personal or commercial level. It has become a symptom rather than a cause. So the markets not "frozen" or "locked up." It’s just a lot smaller.
Another way to say it. If you have good credit, I think you can get a car loan. But a lot fewer people (with both good and bad credit) want to buy cars. So you see fewer loans.
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Dr. Roberts-
Robert Higgs writes at The Beacon:
…check the data on consumer loans published by the Federal Reserve System. The latest report, dated November 7, says: “Consumer credit increased at an annual rate of 1-1/4 percent in the third quarter. Revolving credit increased at an annual rate of 2-1/2 percent, and nonrevolving credit increased at an annual rate of 1/2 percent. In September, consumer credit increased at an annual rate of 3-1/4 percent.” Would you describe this report as indicating a “frozen” credit market? Total consumer credit outstanding in September, $2,588 billion, exceeded the average amount outstanding in any year from 2003 to 2007, the period of the credit bubble.
If I'm not mistaken, the number of first time home buyers is up. The cheaper real estate means that many of them are no longer priced out of the market. They seem to get access to credit without much trouble.
Unfortunately I don't have the time to give you any data or citations. I'll try to provide some later.
Matt C.,
Good data. My prediction is that October will look very different.
It seems that we have to ask why borrowers and lenders are less willing to lend and borrow. If it is just a wealth effect from downwardly revising future lifetime income/wealth, then maybe it isn't a big deal. That story says, my assets are worth less than I thought they would be–my future earnings will be lower than I thought, I better not borrow/lend as much as I was going to.
But I think the people that are worried about the credit crunch think that the leftward shifts are being caused because the information costs of buying and lending has dramatically increased. I think they would point to two things:
1. many financial intermediaries that specialize in lowering the costs of borrowing and lending are failing/have failed and can't do the job they were doing.
2. it has become very difficult (costly) to assess who it is safe to borrow and lend to because no one knows what is on each others balance sheets.
I think the people advocating policies are trying to alleviate the second explanation, mostly right now it seems by propping up the people with the "information technology."
I think the fact that consumer credit seems much less affected than the large market business/public finance actually pushes us closer to explanation 2 than explanation 1.
Some facts: [50% of households have no net financial assets, the next 20% only 2.6% of financial assets. Also, when measuring net worth the bottom 70% of households only control 9% of wealth, the top 10% controls 70%]
Bottom line is a lot of people just aren't directly effected that much by the large asset declines we've seen. There lifetime wealth may have slightly decreased, but mostly they can borrow and pay back as before. Also, firms or pieces of firms that lend to them are operating pretty normally.
It seems it is the big market stuff clouded by all these exotic derivatives that are causing a freeze in this other sort of credit market.
Charlie
It took me a while, in following all of this credit news, to sort out the difference between the availability of consumer credit and the behavior of the credit market (where institutions trade bundles of debt). Consumer credit seems largely unaffected for the moment even if newly issued debt is down a bit. However, the credit markets are indeed frozen, dead, down 99% in volume or what have you. I attribute this mostly to asymmetrical information, buttressed by dramatic recent examples of what can happen when the seller knows more than the buyer about the quality of the debt (see: Washington Mutual).
We would expect the paralysis of these markets to cause problems, but in the short term it may be just as well that it is no longer possible to bundle up a bunch of marginal debt and then go looking for a greater fool to buy some synthetic instrument constructed from it.
Unfreezing these markets would I assume involve the introduction of greater transparency or the abandonment of some of the more opaque synthetic securities, so that buyers could have more information about the quality of their purchase.
Russ, you raise a great point, partly because it is not part of the conventional debate.
Underlying the issue of frozen credit is the idea that aggregate demand matters. Lower aggregate demand is cited as evidence of frozen credit. As you point out, lower activity is likely by choice. On average, individuals are smart, and they know enough to make the best decision for themselves. As you noted on NPR, given all the uncertainty, the smart decision is not to act/transact/obligate.
Since so many focus on aggregate demand, they ignore the individual incentives. There are no incentives for risk taking right now. There are only disincentives. Once that changes, individuals will produce and then demand will improve, regardless of the ability of lenders to lend.
What if our aging population is simply indifferent to non-edible consumption? What if all we really want is our microwaves, cable TV, hobbies, and a 50" 1080p HDTV — and we all have those already?
Our cars are designed to last for 20 years, our electronics last about the same. The last three upgrades to our computers were just a lot of fluff — and we don't care anymore. What if we're just tired of it all? What if we just don't care anymore?
Where does this all end? Robots will bring in our crops with a minimum of human labor, our durable goods will last longer and longer — and our appetite for more features simply evaporates as we take on new interests. Is there an end? And as a finale — is this where socialism is inevitable?
This may be the "information costs" that Charlie mentions, but I think volume is down because of uncertainty. Nobody has any clue who's going to be bailed out next, whether a dollar today is worth 10 cents or 10 dollars in a year, how much of their income if any they will be allowed to keep. When every step could be off a cliff people just stand still.
Part of the slow down in borrowing and lending, if indeed there is a slow down, might be due to what you said in an earlier post. People are waiting to see what the government is going to do. You don't lie on a couch while the 800-pound gorilla is wandering around looking for his spot. He might lie on top of you.
There's no credit crunch.
The economy is like a nice, solid brick building that experienced a spurt of not so solid growth. Scaffolding if you will.
Well the winds came, and blew the scaffolding down.
The building is still there, and operating normally.
Politicians have it in their best interests to convince us that the loss of the scaffolding – or the temporary and unsustainable portion of the structure – is really a terrible blow to the entire building.
A lack of scaffolding they tell us is a "building crunch".
I'm glad this post came up, because I just listened today to the podcast with Arnold Kling about credit-swaps, and thought about this very thing.
We're so far from market organization now that it's hardly worth mentioning anymore. Where does the "solid foundation" end and the political scaffolding begin? I have no idea.
In reality, markets don't create solid foundations. Real laissez-faire capitalism is an ever-dynamic, creatively destructive, survival of the fittest, one day at a time, free for all. The reason we can't sell it is that hardly anyone actually wants it, and the capitalists want it least of all.
It used to be that anyone with a pulse could get a mortgage, and your dog would get credit card offers. That have backed away from this situation is a bad thing?
Much of the "credit crunch" is not the affect on how individuals are being treated, but the way large institutions deal or don't deal with each other. When I buy a car I go to a bank or credit union and with a high FICO score have no trouble borrowing. But institutional investors are avoiding the commercial paper markets in fear that a loan made on Friday will be worthless on Monday. Look at the collapse of Lehman Brothers and the major losses in Reserve Fund which damaged trust in money market funds, etc.
Fear is a terrible thing. It leads individuals to stop buying, save more than usual, and the affect on retailers is a decline in sales and profits. As other businesses see the decline, they hold back, and the whole thing cascades downward until something changes. Kind of like Newton's laws.
Laissez-faire is feared only to the extent that is not understood by a vast majority of people.
It is dynamic, but dynamism is not equivocal to instability.
That is a false premise, and thus makes a circular argument.
Dynamism – as an ingredient of a society containing a legal infrastructure for the protection of rights and person – is a key ingredient to the formation of a solid economic foundation.
This dynamic element might seem unstable to the candle-maker of the 19th century facing light bulbs, or to the blacksmith facing the automobile, but a dynamic market is the cornerstone of a free and stable society.
Saying that we face a one day at a time free for all is simply inaccurate. If anyone is really that fearful of daily life I would suggest turning off all sources of media, and perhaps going out for an evening of food, coffee, a leisurely stroll. Observe the fearful chaos of a citizenry on the verge of starvation and bankruptcy at any given sunrise.
O.K. So it's two days at a time or three?
I don't fear the free for all. I jump out of airplanes. I don't deny it either. One day at a time suits me just fine.
If our society is so unstable as to be genuinely one day at a time in the context of which it was originally stated, what would a truly stable society look like?
Our unemployment rate doesn't fluctuate more than 1% or 2% over the course of years at a time. Even amidst this current crisis, between 97% and 98% of American homeowners are not in trouble with their mortgages. The average poor person has a car, a warm home to sleep in, a color television with cable to entertain themselves.
Excepting for severe drug addicts, alcoholics and/or their dependents, no one is wondering where their next meal will come from. No bread lines, no riots, smooth transitions with our political offices, no military coups.
What would true stability i.e. a strong foundation, look like? Universal healthcare? Government guaranteed 100% employment? Lifetime pension like benefits for the entire population?
Anything less than those Utopian dreams is by default then weak, unstable or something less than a strong foundation?
In what context was "one day at a time" originally stated? You're bickering with yourself here. I want a dynamic market economy.
I don't at all believe that a free market economy guarantees people cradle to grave security, even if they stay in school, work hard and dollar cost average the S&P 500 with ten percent of their income every year.
Well, we have nothing like a laissez-faire capitalist economy, but I've never suggested that such an economy would have recessions any deeper or unemployment any higher or mortgage defaults any more frequently than we have now, and I don't believe so.
I do believe that bank depositors would lose money more frequently, and if we're using bank depositors to police bank credit, that's exactly what I want, although we don't really need bank depositors at all, and they may do more harm than good to the business of extending credit, because they're rent seekers.
Are you advocating these things?
Yes, I'd like catastrophic health insurance to be practically universal, and I'd like everyone who needs a job to find one without undue difficulty, and I'd like everyone decently supported during periods of disability, including the disability most of us can expect in the waning years of our lives.
No, I don't think we need Federal agencies arranging these things, but we do need some lawful order if we want to expect them with some degree of certainty. Nature provides no similar certainty.
Dr. Roberts,
I would be interested in your comments regarding the continuing strong growth (at least through October) in "commercial and industrial loans" on the balance sheets of our nation's commercial banks. (as reported by the Fed's weekly H.8 report) I should probably point out the distinction between line six (commercial and industrial loans) and lines 11 and 12 (consumer and credit card/revolving plan loans). It is the former to which I am referring.
For most of this year, I have been at a loss to reconcile this data series with the continuing talk of a "credit crunch".
Thank you in advance for your thoughts.
Great stats, Stephen. Somehow, any decline seems to follow the bailout.
Here's a long-term chart of the statistic. It fell a while "following" 9/11, but it increased rapidly thereafter.
I write "following", because the decline preceded 9/11 by a few months. I'm no conspiracy theorist. That's just what the numbers say.
Thanks, Martin. Yeah, I've been following the data series for a long time.
What I don't get is how commercial and industrial loans grow 15% yoy, all while there is much weeping and gnashing of teeth about a "credit crunch". I know I am repeating myself, but I am hungry for some thoughts – hell, I'll settle for conspiracy theories at this point – as to how this happens.
I had resigned myself to the fact that there really IS no credit "crunch". The bankers and business folk to whom I talk (non-Wall Street variety) pretty much confirmed that for me for months. But I kinda thought I might find other ideas here.
I don't doubt the data are probably turning. Given the extreme panic in October, I would expect economic activity to have hit the wall. Spending hits the wall. Capex hits the wall. Borrowing hits the wall. The numbers will logically flatten or even decline from here.
But for a year, the H.8 data have totall contradicted the headlines.