Credit Crunch: Very Real
There continues to be a semi-popular line of counterintuitive analysis holding that the entire financial markets crisis is some kind of fraud trumped-up by firms who want to get their hands on some of the $700 billion honeypot. For anyone who thinks that, a free trip to a European country with a finance-heavy economy would be instructive. Talk to people in the finance game on this side of the Atlantic and you’ll hear a lot of displeasure with the way European governments are handling their end of the bailout. Long story short, it’s much less of a sweet deal for the firms involved than what Paulson, Bush, and co. have been doing in the United States with much more onerous strings attached. As might be expected, they think a more generous US-style approach would be better.
No reason to take them especially seriously on that. But what you should take seriously is that they very strongly favor the bad deal they’re getting to do deal at all. And that’s because the crisis is very real. The fact that the crisis is real doesn’t mean that special interests won’t try to corrupt the process and get as much as they can. But at the same time, the mere fact that special interests are trying to corrupt the process doesn’t make the underlying issue some kind of fiction. What’s needed is vigilance and good policy, not paranoia and ignorance.
48 Responses to “Credit Crunch: Very Real”
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November 11th, 2008 at 1:52 pm
favor the bad deal they’re getting to do deal at all
Maybe you could consider re-reading and editing only the parts you emphasize before you hit submit a post. Just a thought.
November 11th, 2008 at 1:54 pm
I tend not to harp on your typos (in fact, I usually enjoy them), but when you italicize the central point in your post, it would probably be a good idea to at least proofread that phrase so your readers aren’t befuddled.
November 11th, 2008 at 1:56 pm
Er, um, what SCMT said more quickly than I did.
November 11th, 2008 at 2:06 pm
it’s worth noting here that not only is the credit crunch “real,” it’s not going away anytime soon.
there are 3 issues we are facing with the economy: the first was the risk of a complete lockup of the global finance system. the money that’s being thrown that way probably means it won’t happen, but it’s still a serious risk.
the second is the brutal recession looming: there are no obvious engines of growth in the american economy, which is why bold fiscal stimulus is so important at this time.
but the third is the dread deleveraging, and here the problem is very long-term. for roughly half a century, the american economy has relied upon easy access to credit, but as leverage is reduced, so will easy access to credit be. we haven’t had a recovery that wasn’t powered, in part, by an expansion of consumer spending supported, in part, by borrowing, but that is much less likely to occur this time around.
so we can probably get by the credit crisis, and we will, one way or another work through the recession, but reduced access to credit will be with us for quite some time.
here, btw, is an excellent little piece (originally recommended by the wonderful yves smith at naked capitalism) on deleveraging that expands what i just said but still keeps it short:
http://online.wsj.com:80/article/SB122611122832410627.html?mod=googlenews_wsj
November 11th, 2008 at 2:09 pm
I tend not to harp on your typos (in fact, I usually enjoy them), but when you italicize the central point in your post, it would probably be a good idea to at least proofread that phrase so your readers aren’t befuddled.
Oh come on you pantywaists, proofreading is for sissies. We know what he’s getting at even with the typos.
Fannie & Freddie bailout: $200 billion*
Bear Stearns bailout: $150 billion*
AIG bailout: $300 billion
Bank bailout: $800 billion
Alan Greenspan admits he was wrong? Priceless
—–
* too lazy to look up actually numbers
November 11th, 2008 at 2:15 pm
The “Credit Crunch” is real but it is only a crisis for the bankers you’re talking to, not for the rest of us. Basically, banks made some bad bets and have lost a lot of money, so much that many of them would go bankrupt without government help. However, the idea that “Wall Street” needs to be bailed-out in order to save “Main Street” is just garbage. Read Dean Baker if you don’t believe me:
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=11&year=2008&base_name=its_the_housing_bubble_not_the
November 11th, 2008 at 2:22 pm
#1 and 2- I’ve always assumed that Matt never, ever rereads anything he types. I’ve yet to see any evidence to the contrary.
November 11th, 2008 at 2:24 pm
Matt, I am a professional copyeditor with literally over three days of experience. As a public service, both to the regular readers of this site and the English-speaking community as a whole, I hereby offer to proofread your blog for the LOW, low price of just fifteen dollars a day.
That’s right: For just a pitcher of beer a day, you can luxuriate in the splendor of a blog that’s typo-free, liberated from the worry that some errant homophone or stray subject-verb disagreements has led your readers into states of panic, disbelief, and/or outright snarkiness.
Please act know. Think off the chidren.
November 11th, 2008 at 2:27 pm
Care to tell us what you mean by credit crunch? What metrics are you looking at?
November 11th, 2008 at 2:27 pm
There continues to be a semi-popular line of counterintuitive analysis holding that the entire financial markets crisis is some kind of fraud trumped-up by firms who want to get their hands on some of the $700 billion honeypot.
Yes I’d call this line of analysis more than just semi-popular at certain liberal blogs (cough-Digby-cough). It’s annoying because effectively defending financial firms against DFHs makes me feel like some kind of goddamn Republican, and then I feel the urge to bathe.
November 11th, 2008 at 2:31 pm
What metrics are you looking at?
Uh what metrics don’t suggest a credit crunch? Corporate spreads? The TED spread? Treasury yields (flight to safety)? I mean there’s been improvement recently but there is massive deleveraging going on and credit remains tight to say the least.
November 11th, 2008 at 2:49 pm
1) Matthew, do something useful and ask the Swiss what they think of the “Tax Haven Abuse Act” that Obama introduced in the Senate last year.
See http://www.breitbart.com/article.php?id=081111031612.fkpw9hhx&show_article=1
Hint: Switzerland is on the “List”
2)And why are you attacking this Strawman?
“the entire financial markets crisis is some kind of fraud trumped-up by firms who want to get their hands on some of the $700 billion honeypot.”
a) Actually, it is more like a $2 TRILLION Honeypot , as I’ve explained repeatedly
b) On top of the $5 Trillion Honeypot they already slurped up?
Bush and Congress didn’t steal from the Rich and give to the Poor — to the Contrary. They stole $3 Trillion from Social Security and Gave to the Superrich.
c) The Superrich don’t “want to get their hands on SOME” of the honeypot –they don’t want shit. They already have their goddamm heads insides the jar.
Because You, Pelosi, Reid, and Obama wouldn’t even DISCUSS the idea of a $2 Trillion Income Surtax on the Superrich as a CONDITION for the Bailout.
No — you will put that off until LATER. Then, when Mitch McConnell shoots it down in flames, you can pretend regret and claimed you fought the Good Fight.
November 11th, 2008 at 2:54 pm
dcreader, you need to read more carefully: what dean is saying that the precipitating event of the current crisis was the collapse of housing prices.
that’s certainly true.
that doesn’t mean there isn’t a credit crunch (as lowellfield notes). maybe it’s worth spending a moment on “leverage” (in highly oversimplified terms) to make this clearer.
the old saw about bankers was that they lived by 3-6-3: pay depositors 3%, loan it out at 6%, and hit the links by 3 p.m.
but there’s not enough profitability in just loaning out your assets with a 3% margin (and there’s no reason to limit yourself that way), so commercial banks are allowed leverage of 10X on that asset base.
but what happens if that asset base declines in value? then you, as a bank, have no choice: you need to call in some of your loans, because you are regulated: you can’t exceed 10x.
in addition, we used to have a bunch of investment banks who weren’t regulated and who were leveraging up 30X; sadly, none of them exists anymore! so goldman, for instance, is on its way down to 10X, since it’s now a bank bank and not an investment bank.
so that’s more credit not in the system.
now, how does this affect you? well, it means that loans are much harder to get because the system has less headroom within which to lend. for example, credit card companies have been able to bundle up receivables and securitize them, thereby getting more cash into the system and increasing the lines of credit they can offer cardholders.
but now, no one is buying those securitized bundles; as a result, they can’t offer more credit.
etc., etc., etc. (like i say, this is highly oversimplified, it’s just illustrative).
so i’m not disagreeing with dean: of course the housing collapse is the straw that broke the camel’s back. but 10x on a broken-backed camel is a lot less credit than 30x on a healthy camel, and the system (as i noted earlier) relies on ready access to credit.
(see the link i posted at 2:06 for a little more detail.)
November 11th, 2008 at 3:00 pm
I’m agnostic on whether there’s a ‘credit crunch’ (which seems to beg the question). Let’s assume for the sake of argument that there is.
How exactly was Matthew’s observation here meant to prove it?
As far as I can tell, he spoke to some banker friend(s) of his in (probably) London, who complained that his firm isn’t getting as big a handout, on as good terms, as U.S. firms.
How exactly does this rebut the claim that the claims of crisis is a trumped-up effort to get gov’t handouts?
Is it the part where Matthew emphasizes that they ‘favor a bad deal to no deal at all’? But that just means they’re worried about their company and job going away. You will find the exact same attitude among the rank and file at GM, I suspect. How on earth this is supposed to prove the ‘credit crunch’ is real and something we should all care about (as opposed to merely, trouble at certain financial firms) – is beyond me.
Is the definition of ‘credit crunch’ = ‘trouble at certain financial firms’? If it is, why should anyone who doesn’t work for those firms care?
Keep in mind, I don’t necessarily dispute that there’s a credit crunch. Nor do I think that the questions of the previous paragraph have no good answers. But Matthew certainly did not give them here.
November 11th, 2008 at 3:06 pm
The credit market is broken. The credit market is the mother of all markets. It was destroyed by the insistence of the financial world for cheap credit and the monetary and regulatory systems for manufacturing it. In other words by corrupting the market. The high priests of free markets debased and manipulated it and have now wrecked it.
The US Treasury is corrupt shell and the assets of the Federal Reserve are now predominantly junk and they have started to openly monetize that junk.
Don’t think to much about how the Friends of Hank are getting such good deals because while they stink, the deals and the friends, in the end they won’t be so good. Rather it’s just their habitual gamesmanship coming out to fight over the scraps.
The entire structure of the economy for a generation was dictated by the availability of too cheap credit. The result was over consumption and malinvestment.
November 11th, 2008 at 3:21 pm
DCreader,
Baker absurdly complains that economics reporters are wrongly reporting that the economic downturn is caused by a credit crunch, and continue to ignore the housing bubble. Yet the collapse of the housing bubble – “the subprime meltdown” – has been reported at length and ad nauseum in the media, for a very long time. It is indeed the factor that is most often cited as the chief cause of the credit crunch: the collapse of the housing bubble made the flood of mortgage backed securities go toxic, supposedly ending and threatening the solvency of several important financial institutions, thus freezing up credit.
However, Baker is right to complain that some of these reporters tend to listen too much to the financial sector, and are thus only feeling one part of the elephant. Reporting on Wall Street is not the same thing as reporting on the whole economy. We do need to hear from more labor economists and more “real economy” economists. And Baker and others are right to note that we need to shift part of our attention to the fact that we now have a collapse in consumption due to declining real wealth, fear of excessive debt and declining consumer confidence.
But it’s dangerously wrong to suggest that Main Street can be insulated from what happens in financial markets. Most of us have jobs that depend in many ways on an economic engine that needs to be continually lubricated by capital from the financial system. Beyond that, the financial sector is a large part of our economy. If any large sector experiences massive losses and unemployment, it effects a lot of other parts of the economy, because those people and their firms are, if nothing else, consumers of products from other sectors.
I have been very disturbed during this whole crisis to discover how many people seem to have little appreciation of the interdependence of the various sectors of the US economy on one another, and their collective interdependence on the global economic system. We are now facing a global economic crisis that requires to be addressed with organized, coherent global strategies and discipline. Unfortunately, we have antiquated political systems that sometimes stand in the way.
November 11th, 2008 at 3:27 pm
Al -
How much are banks expanding their lending activities? Does this include amounts drawn down under revolvers because the borrower was worried it might not be available in a few months?
I’m sure you’re right and maybe have access to better data than I do, but when I read about McDonald’s franchisees not being able to get loans for a new coffee bar, and blue chip companies having to pay confiscatory interest rates on their debt, I wonder where all the bank credit volume is going.
November 11th, 2008 at 3:45 pm
Total bank credit is expanding at a very high rate right now. The important point is that Wall Street has totally stopped being a source of credit. Their securitization model is dead and with it the main source of credit for eveything from credit cards to autos, boob jobs to Harleys. Wall Steet MBS activity is dead and gone. The GSE’s are wounded, unable to step into the breach to provide huge amounts of new credit, the great Greenspan design.
It must be understood that banks came to be a secondary source of credit during the boom. Now they are sick and are the only source, besides the Treasury. The credit market isn’t just crunching, it’s collapsing. The first casualty has been the asset prices based upon leveraged speculation. Now it is bleeding out into the real economy.
November 11th, 2008 at 3:49 pm
Re: it’s worth noting here that not only is the credit crunch “real,” it’s not going away anytime soon.
Depends on what you mean by that. LIBOR rates have already declined back to reasonable levels so the credit crisis is basically over for large corporate borrowers, who usually pay that rate. As far as individuals go, people with good credit scores will have no problem getting loans, though for mortgages they will need some downpayment and the house they are buying cannot be overvalued. Expect very close scrutiny of any HELOC or 2nd mortgage application too.
Basically, we are seeing the restoration of sensible and prudent lending standards in place of the “shovel-money-to-everyone-with-a-pulse” regime that we had from about 2002 into 2007. This is only a crisis because we are not used to it now.
November 11th, 2008 at 3:52 pm
Al -
Here’s some chart porn showing that risk premiums for everything below AAA corporate bonds have skyrocketed, even if they’ve come off their highs.
And I do think it matters whether the loans are just draws under existing facilities because rather than signaling that the bank has confidence in the borrower, it signals that the borrower LACKS confidence in the bank (i.e. don’t let the bank go bankrupt while we still have a line of credit with them).
November 11th, 2008 at 3:53 pm
Oops. Link didn’t embed. Here it is:
http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=7252
November 11th, 2008 at 3:54 pm
I’m with Sonic. I’m amazed that Matt, who was evidently a philosophy major, thinks this is a good argument. The fact that the financial players prefer getting a good chunk of the $700 billion to not getting it proves very little; I would too, completely independently of my economic position. The fact that they think the strings are worth the candle shows there may be some threshold of oppressiveness that the strings do not, from their perspective, surpass, but that says nothing about whether the underlying problem is real.
November 11th, 2008 at 4:01 pm
If it is, why should anyone who doesn’t work for those firms care?
Because a lot more people work for firms that borrow from those firms.
November 11th, 2008 at 4:47 pm
Look, I’m an econ PhD, so yeah, I know what de-leveraging is. I’m not denying there’s a bad recession coming our way, but I think the problems in credit markets are caused by the larger economy rather than vice versa. This means our focus should be supporting the “real” economy rather than banks.
In fact, there’s not a lot of evidence that the “credit crunch” is anything other than a return to prudent lending standards. Someone up-thread mentioned that McD’s franchisees can’t get loans for installing expensive espresso bars as evidence of dysfunctional credit markets. I disagree. The worst recession in decades is not the time to be rolling out pricey luxuries like espresso at McDs. Skepticism on the part of lenders is warranted here. Everyone talks about the TED spread. Yeah, it’s big, but if you look at actual _interest_rates_ they’re well within historical norms. All the TED spread says is that no one wants to lend to banks right now.
If you don’t believe Dean Baker, believe these Fed economists:
http://www.minneapolisfed.org/research/WP/WP666.pdf
Tyler Cowen and others have tried to de-bunk them, but none of them can offer hard evidence that there is in fact a credit crunch that affects Main Street. They just say that us skeptics can’t prove there _isn’t_ a crunch. Color me unimpressed. The burden of proof is one them that the sky is falling.
November 11th, 2008 at 5:02 pm
The worst recession in decades is not the time to be rolling out pricey luxuries like espresso at McDs.
Either banks don’t have enough confidence in McDonald’s (whose comps are running about 8%, btw) to lend them money to install coffee bars, or the other credit crunch skeptic upthread is right about their being no contraction of credit, but it can’t be both.
November 11th, 2008 at 5:32 pm
The credit collapse has overwhelmingly effected the leveraged speculating community. That’s all of Wall Street, most of the worlds financial entities and of course hedge funds. It should be noted that many of the worlds great non financial corporations, like GM or GE, were in fact mostly financial players who happened to make stuff and are badly hurt too.
The sheer panic on the part of the elites starting a year ago when Ben slashed the FF rate the first time was coincident with them getting hit over the head with the fact that their institutions were going to lose several trillion dollars and culminating with Ben and Hank going into congress one evening and declaring the end was neigh. Subsequently around $2 trillion has been loaned and or given out to the FOH while they tell us the story it’s all for our own good. That’s because they happen to see themselves as the most important people in the world from whose work all wealth flows. Self interest of course having everything to do with this view but I don’t discount they firmly believe it.
While the Pigmen ran wild for 20 years creating wealth by inflating assets via leverage real investment languished. We did build several hundred million of square feet of retail space and several million homes too big and too expensive to pay for. Both of which became the bulk of all new employment, along with the financial sphere of course. None of which actually build wealth of the sort Adam Smith would recognize. It’s this last point which is the reason why the real economy is going to shrink and shrink and shrink some more. America now knows only how to tend to consumers and how to inflate assets. (the other lynch pin of employment growth was health care which can make profits only by excluding more and more people from getting it)
November 11th, 2008 at 5:51 pm
Yeah, what rapier said.
The market corrects by way of suicide. Es solo dinero. Too many workers spent over 40 hours a week making money for someone else in a money making scheme. We start to make durable goods of quality again, that the world wants to buy, and we’ll be fine. What good is money if all you can buy with it is crap and bottomless crappiers?
Wall Street is too myopic and inbred to be a real boon to our market. Perhaps we can make improvements in the quality of our lives with less feverish economic activity, and more intelligent and practical uses of our time and resources. Perhaps there will be enough people with enough free time in the near future to get across the ideas that labor and resources creates capital, and land is not capital.
Henry George! The Chicago School should be history any minute now.
November 11th, 2008 at 7:38 pm
Brian Doyle writes
“Because a lot more people work for firms that borrow from those firms.”
And those firms are..unable to borrow? I do not believe that is so.
Except of course for that backbone of our economy, the McDonald’s Coffee Bar. No Coffee Bar at a McDonald’s! My stars, not even the Joads had it so bad.
November 11th, 2008 at 8:43 pm
Re: Your point about lines of credit is an intersting one, but do you think that firms would really draw down their lines (and therefore pay interest on the drawn down amount) because they are afraid their bank might go bankrupt and their line might not be available later?
My take on this (and I work in exactly this area) is that this was not the fear at all. Rather the fear was the LIBOR rates would keep going higher and higher over the next few weeks so it was better to borrow now, and lock in the rates for three months, rather than wait a month and be charged even higher rates. This is classic inflation-driven behavior, and for a couple weeks the escalation of LIBOR rates qualified as hyperinflationary.
Moreover these large credit facilities are funded by groups of lenders. If Bank A goes belly-up its shares in the facility will be sold to some other lender who will replace it in the facility. As far as I know there have been no problems with replacing defunct banks in these cases. Lehmann’s parts are being wound down in an organized manner, while Bank of America is inheriting Merril Lynch’s obligations, JP Morgan has picked up for Bear Sterns (which it acquired), Wells Fargo will inherit Wachovia’s participations, and so forth. In fact, trading in corporate loan shares remains a very vibrant activity.
November 12th, 2008 at 3:55 am
Take a look at this proposal by Ran Prieur: http://www.ranprieur.com/ (scroll down to November 11th). Its to make sure that the inflation rate is always higher than the highest interest rate. It sounds insane, but the point is that when this happens it becomes pointless to lend or invest money, any money you get you have to consume now or watch it lose its value.
My problem with the suggestion is that this is effectively what we’ve had for the past several years, the only investments that have grown have turned out to be bubble investments. Maybe this will work in the long run.
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