The credit crunch illusion? Guest post from Rabee Tourky
Here’s a post on the credit crisis from my colleague, Rabee Tourky
In a Minneapolis Fed. research paper Chari, Christiano, and Kehoe
examine three claims about the way the financial crisis is affecting the economy as a whole and argue using a number of graphs that all three claims are in fact myths.
The claims that they dismiss are that bank lending to non-financial corporations and individuals has declined sharply; that interbank lending is essentially nonexistent; and that commercial paper issuance by non-financial corporations has declined sharply, and rates have risen to unprecedented levels.
They conclude their note with the following sharp message:
Our main point is that policymakers have not done the hard work of convincing the public or even academic economists of the precise nature of the market failure they see, of presenting hard evidence, not speculation, that differentiates their view of the data from other views, and the logic by which the particular intervention they are advocating will fix this market failure. We feel that a trillion dollar intervention warrants a bit more serious analysis than we have seen. Our analysis is based on publicly available data. Policymakers have access to other sources of data as well. Policymakers could well believe that bold action is necessary based on data that are different from that considered here. If so, responsible policymaking requires that they share both the data and the analysis that underlies the need for bold policy…
Of course, they cleverly anticipated Brad Delong’s response to their note by arguing that analysis of the financial crisis focusing on interest rate spread lead to mistaken inferences.
I came across the Chari, Christiano, and Kehoe paper via another
response to it, which kind-off skirts some of the shaper ends of the Chari, Christiano, and Kehoe mythology.
I wonder how the credit crunch myth sits with the following graph of the M1 multiplier (the ratio of M1 to Base Money)? I generated the graph on the
Federal Reserve Bank of St. Louis site.
Has the money multiplier really collapsed to almost one? What are banks doing with their deposits? Are they hording new deposits in underground volts?
Will somebody please either tell the Fed. to correct their October-November entries for the M1 multiplier or tell
Chari, Christiano, and Kehoe that there is too a credit crunch?