Is Credit Drying Up?
So far I have seen two articles indicating that this is not the case. The first is from Robert Higgs who is associated with the Independent Institute and has very strong libertarian views (so strong he might even hold anarcho-capitalists views). The second is from Alan Reynolds at the Cato Institute. Both rely on Federal Reserve data (the link goes to the page Reynolds used). There is just one problem, they appear to be wrong.
I took one of the time series that Reynolds noted, Real Estate Loans by U.S. commercial banks and graphed the weekly numbers. Here is the graph,
It looks pretty obvious to me that since late spring/early summer the growth of credit has been rather flat. After June 11th the trend is decidely negative. Yes there was a surge at the mid to end of July, but overall things look rather disappointing compared to the early half of the graph. If the trend up throgh March 26th were continued to the last date in the dataset we’d have Real Estate Loans of $3,777 billion. Instead we have $3,632 billion which is about 3.8% lower. Another way to look at it, prior to June 11th the average weekly change in real estate loans was about $4.77 billion, after that point the average weekly change was $-2 billion.
I don’t know about you, but that looks like there is less credit available than there would have been absent the current financial crisis. Further if you were to look at things like the LIBOR and TED they indicate that there is indeed less liquidity in the market than previously (link admittedly a bit old).
Market measures: Two market indicators showed the price of borrowing for banks remaining high – a sign that banks are nervous about lending to other banks. These indicators are “at levels that indicate the money markets are still locked up,” said Van Order.
One gauge, the “TED spread,” showed high prices of loans between banks. The TED spread measures the difference between three-month Libor and the three-month Treasury borrowing rates and is a key indicator of risk. The higher the spread, the bigger the aversion to risk. On Tuesday, the spread retreated to 3.04%, after surging to 3.53% – its highest level in more than 25 years.
On Sept. 5, the TED spread was only 1.04%.
Furthermore, the difference between the Libor and the Overnight Index Swaps rose to a fresh record high 2.46% from 2.20% Monday, according to data reported by Bloomberg.com. The Libor-OIS “spread” measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.
The Libor, or the London interbank offered rate, is a daily average of what banks charge other banks to lend money in London. Larkin compared the Libor “the dial on the engine of the car,” showing how much power the economy has. “And right now it is indicating that the car is severely overheating.”
We have seen from multiple data sources indicators that there is indeed less credit than there previously was, credit is indeed drying up.
The commercial paper outlook is bad, too. Things can’t be looking bright there if the Fed is stepping in to make short term loans to businesses. What’s even worse is now the dollar is getting strong at exactly the wrong time we need it to…
Stupid question…how does all this relate to credit card credit. Is it one in the same?. The only reason I ask is I had to go to a large shopping mall last weekend in Novi Michigan. On the way to the mall I was thinking the place would be almost empty and I could quickly get my goods and split. I was wrong, it was PACKED…like December 23rd packed. Were people “gettin’ while the gettin’ was good???.
Small declines in outstanding credit are not accurately described by terms such as “drying up,” “frozen credit,” “locked-up credit markets,” “melting-down credit markets” and others now current in the financial press and among commentators, especially when we recognize how rapidly credit has grown in recent years. We now know very well that for several years much credit was extended recklessly, without due diligence, to borrowers who were not actually creditworthy. The declines in outstanding credit we are now seeing in SOME PARTS of the credit market should not be viewed as necessarily a bad thing. Credit can be, and in recent years has been, overextended, given the underlying economic realities.
Talk about cherry-picking the data. If, instead of 6/11/2008 for the initial point of your trend-line analysis, you were to use 7/9/2008 or any date prior to 4/1/2008, the trend is definitely UP.
Arcs,
Sorry no, that trend line is flat. Statistically the result is indistinguishable from zero.
Oh and the trend since 4/2 is negative and statistically significant, so no that assertion is false too.
Robert,
I guess that depends on what we are looking at. The week-to-week changes are usually not very large when taken as a percentage of the whole. Going from an average change of just under 5 billion to negative 2 billion is a big change. Is there a melt-down? That is hyperbole to be sure, but there is less credit than there was and the pinch is starting to be felt. Will it lead to the catastrophe some have predicted…I doubt it.
I’ve read your work, especially Crisis and Leviathan, and I don’t think we are at a point that justified the bailout bill. Maybe something needed to be done, I’m still not convinced, but that was just stupid, IMO.
Steve, I’ll have an anecdotal data point for you in about two weeks after I’ve met with my banker to discuss next year’s financing needs. I am a lot more worried about small companies like mine not being able to get credit than about Lehman Brothers going under.
I still think it would have been better had the government borrowed money from these banks that have the money but are worried about making a bad load, like I suggested a while ago.
Steve,
Those numbers look to be the value of assets in commercial banks at that time, am I right? If that is the case, then wouldn’t the mark-down in the value of existing mortgage-backed assets account for the drop in mid-July, and not necessarily a drop in the amount of credit being issued for real estate? Overall credit for the same time period didn’t decline significantly, so this seems isolated to real estate investments, not things like commercial paper, right?
Michael,
Yes. Not sure if your correct or not. For example, my home loan is in there somewhere and that assets value probably hasn’t changed a whole lot since I haven’t refinanced in years. On the other hand, a mortgage that definitely goes south and the borrower has stopped paying? I don’t know what that does. I’d think it would lower the value. In any event it is a crude measure to be sure. And I don’t think comparing the current values to the value a year ago is all that good a way to look at the data. A graph and some basic statistics go much further, IMO.
Steve,
What was particularly interesting to me was the lack of such a decline in the non-realestate numbers. From my understanding, the “credit crunch” problem is that businesses and governments can’t get short-term credit to cover immediate expenses, not that they can’t get credit to purchase real estate. If those credit lines are not declining, then perhaps Higgs and Reynolds are right on their view of the overall market.
That’s true, I’ve only looked in detail at one series, not all of them. I don’t have that kind of time right now. If I get that kind of time I will post more on this. I guess my view is in the middle, but closer to the Higgs/Reynolds viewpoint. If we aren’t already in recession we very well could be if credit contracts enough.
Note I’m not predicting catastrophe; just that the economy isn’t going to be doing well for awhile.
I suggest you look a the Fed quarterly flow of funds data. It is the best available and gives accurate aggregate data while others are cherry picking data series to prove the point they want to. Offsetting this the flow of funds data is slow in being reported. But as of the second quarter is clearly shows a sharp slowing in the growth of total credit from double digit levels to around 3%. It will be interesting to see the final third quarter flow of funds data. I will really be surprised if it does not show a continued sharp slowing of credit growth
But is it slowing because their aren’t borrowers or because there aren’t funds? The former is probably a good thing while the latter isn’t.