Tuesday, September 30, 2008

Waiting for the Sky to Fall?

As I've mentioned before, the evidence of a "credit crunch" has been slim... or the evidence has been completely contrary to what is reported on the national news.

Last night ABC News had an "expert" fund manager yelling that "right now it's impossible for anyone to get a mortgage," which is blatantly false and not what the data say. (Stunts like that earned ABC a boycott from me for the rest of the week).

Mark J. Perry posted these charts yesterday which illustrate that very recently consumer loans, commercial loans at large industrial banks, and real estate loans were at an all time high and moving on a very upward trend. However, you can see on Dr. Perry's charts that things start to level off right at the end of the timeline... and most of these data are already outdated.

Rebecca Wilder posts similarly but then discovers an important issue in the data:
In her words:

The chart illustrates weekly consumer loans broken up into revolving credit (credit cards) and "other" types of consumer loans. Revolving loans account for the smaller share of total consumer loans, roughly 40%, and have been accelerating since July. On the other hand, other loans account for the larger share of total consumer loans, roughly 60%, and have been either constant or falling since the end of July. Therefore, revolving credit has been the driving factor in recent consumer loan growth.

The very end of the timeline, where the two lines cross, tells us that people are seeing the end of access to traditional loans and are instead resorting to credit cards. And as more people do that, the credit card companies get stretched and have begun to raise interest rates, further increasing the cost of borrowing.

So, while the "credit crunch" has been prematurely hyped by the media it appears to be here and will show up as newer data come available.

When will Main Street really start to feel it? A week? A month? I don't know.

Oddly enough, despite yesterday's chaos today was relatively calm. The Volatility Index regressed to a less-frightening level, the TED spread also declined, and the yields on Treasury Bills increased while the yield curve for U.S. Treasuries assumed a steeper slope than what was present at 5pm EST the day Congress voted "No." All of that points to an improving market, not one in decline.

Was that because Congress said they'd try again and get it right this time? Maybe. Was that because the Fed started increasing the money supply and Treasury acted on their part to buy some bad assets anyway under an old housing law? Maybe.

The main question I have for any economist who might drop by here is:

Does it matter that banks aren't lending to each other anymore since they're all now borrowing more cheaply from central banks? What incentive do they have to borrow from each other when the discount rates worldwide are so low?

Someone else has talked about there still being "good bridges" out there -- ie: healthy lenders able to make loans to credit-worthy borrowers. The trick is just for borrowers to find them, it's more difficult for the two to connect now. Seeing as how that seems to be the case, why should we worry? Shouldn't the market eventually bring the borrowers and the healthy lenders together?

Those are my questions.

1 comment:

Dawny said...

At the heart of all these problems lies lack of trust among economic entities. Trust, the most important lubricant in market transactions, is gone after big-name financial institutions fell down one after another. The problem is not the fact that banks are not lending to each other, but the reason why. Money doesn't mean anything if it doesn't circulate. No matter how available it is, if people are not inclined to spend, lend, and invest, it doesn't help the situation. What makes me really scared, is that there seems to be no one to turn to. People who are supposed to be in charge seem to be panicking most... I believe that's because they don't really understand the real magnitude of this mess. They are making things worse by unnerving everybody.