Thursday, September 25, 2008

Economists wonder- Where is the credit crunch?

President Bush:
"As uncertainty has grown, many banks have restricted lending, credit markets have frozen, and families and businesses have found it harder to borrow money."

Is that statement true? One thing that has bothered me in recent days are that while everyone is talking about credit tightening, the data presented tell a different story. Tyler Cowen cites sources that "consumer loans are up, commercial and industrial loans are up, even real estate loans are up. Overall, total bank credit is up with just a slight sign of leveling off in recent weeks. So where is the credit crunch?"
Mark J. Perry (Carpe Diem) echoes this sentiment here: "At least for consumer credit, and at least through July, the supply of consumer credit has never been higher."

So, is there evidence of credit tightening? Yes, banks are not lending to each other and money market rates are way up.

Shifting gears, let's compare the cost of a recession to a bailout. Morris A. Davis writes
"Suppose the bailout costs 500 billion. Suppose the bailout is effective in avoiding a recession -- The bailout itself costs 3-1/2 percent of GDP. I think you have to go back to 1982, maybe further, to get that kind of contraction in GDP during a recession."
In other words, a recession would be less costly than the bailout if you use GDP as a measure.
(HT: Mark Thoma post with lots of views defending/opposing the bailout).

Leading indicators point to a recession, but that's not the issue. The business cycle isn't completely tamable and it shouldn't be our government's goal to avoid recession at all costs. My biggest issue is that Bush and Treasury are making this out to be a no-costs-later issue, which is incredibly misleading. As posted on Freakonomics today, quoting Jon Stewart about how many McDonald's Apple Pies $700 billion can buy (emphases mine):

"The plan is to give Paulson a $700-billion war chest to purchase securities that have some value.

Now it might be that we are buying truly valuable securities at bargain prices, in which case we all make apple pies (ie: profit in the long run); or it might be that we are buying junk, and the true cost will be several-hundred apple pies each."

(Note: In fairness, someone apparently very close to the situation e-mailed Mankiw with a defense of the Paulson plan versus all other proposed amendments).

One thing I love about the internet is watching the debate over the past several days. Economists putting out ideas, critiquing each other, revising their ideas, and exposing all the costs/benefits. It's been a most educational week for me.

1 comment:

Keith Walters said...

As an economists I am sure you will love this article if you have not seen it yet.

http://technology.timesonline.co.uk/tol/news/tech_and_web/article4742147.ece?token=null&offset=12&page=2