Friday, October 3, 2008

Credit Crunch is a Farce - No to the Bailout!

I began to believe within the last few days that the "Credit Crunch" was an illusion, and the more I have dug the more I have come to the conclusion that the Crisis Does Not Exist. It is a false narrative told by those with vested interests and insular Wall Street viewpoints.

According to the FDIC, only 13 banks have failed so far this year. This compares to 11 in 2002, and thousands after the Savings and Loan debacle. We have yet to reach a level of bankruptcies to warrant dramatic action.

Looking at total bank lending according to the Federal Reserve, again I do not see contraction of loan activity as is claimed. Link here. Lending is flat over the last few months, but similar events happened in 2003, 2002, 2001, and 1999. Furthermore, Commercial and Industrial loan activity has not contracted at all. Link here. The press keeps claiming that businesses can't get loans. Between 2001 and 2004, Commercial and Industrial loan activity contracted by around 18%, but we have yet to see any fall in recent history.

Mind you, the links I provide only show data up until the beginning of August. However, Alan Reynolds has written a piece for Forbes that includes data up through September 17th. (Includes a nice table) He is coming to the same conclusion that I am.

If all the recent hysterical chatter about lending being "frozen" or "shut down" refers to anything real, it is not about banks loans (through Sept. 17) but about such arcane financial markets as asset-backed commercial paper or loans between banks. But this too is mainly about financial firms, not Main Street.
Adding to the case is anecdotal evidence from my hometown paper, the Houston Chronicle.

"It has not had any change to the way we offer and extend credit to our customers," Mike Poppe, chief financial officer for Beaumont-based electronics and home furnishings retailer Conn's

"Everything is the same," said Mike Even, Finger Furniture's general manager. "I don't see any changes anytime soon."

To top it all off is economist Alex Tabarrok of Marginal Revolution blog:
There is also a consensus among economists that the bailout bill is not the right policy. None of the above economists, for example, is enthusiastic about the bailout. My bet is that all of us think that the bailout has a substantial likelihood of failing. The support that exists is born out of hope and fear not judgment and experience. Nevertheless, the political consensus is that a bailout is what we will get whether it is likely to work or not. (bold is mine)
The above economist are: Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan

The bailout will not work. The "Credit Crunch" is a farce. This is a Wall Street problem, NOT a Main Street problem. Encourage your Congressman to Vote NO to the bailout.

Update: - Unfortunately, it passed. Not good for the economy. What do we do in 3 months when the bailout clearly did not work.

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