We all know there's a credit crunch, right? That's the basis for the latest (March 2009) Treasury bailout proposal. So I went looking for the evidence, just to prove to you skeptics that there really is a credit crunch. I looked at business loans from banks (data here), comparing all the post-World War II recessions. Here's what I found (latest cycle in thick blue):
The data link above has a plain-vanilla chart, in case you don't like my recession-comparison baby.
In the current cycle, see that bulge in loans that peaks about 11 months into the recession? I think the data are misleading here. When the commercial paper market closed down after the Lehman bankruptcy, large companies shifted to bank loans, using standby lines of credit. The corporations had been paying fees for the credit lines, and the banks were contractually obligated to make the loans. I haven't seen any estimates of how big that effect is, but I think it works itself out in six months or so, and may account for some or all of the recent decline in lending volume–but we really don't know.
Comparability issue: in the old days, bank loans were the primary mechanism for short-term corporate borrowing. That hasn't been the case for some time; there's a lot of non-bank credit out there, not reflected in the chart.
I can imagine three hypotheses about this recession:
1) The recession was caused by a credit crunch within the banking sector
2) The recession was caused by a credit crunch outside the banking sector
3) The recession was caused by non-credit issues, and the drop in credit is just a normal part of the recession.
It seems to me that for the first hypothesis to be true, we should be seeing a much more severe drop-off in business loan volume.
For the second hypothesis to be true, we should see wider risk spreads in financial markets, which we've certainly seen. (See Calculated Risk's credit summary.)
For the third hypothesis to be true, we need other triggers. Candidates for the other triggers:
- The drop in residential construction, as a consequence of past overbuilding
- A collapse of consumer confidence, caused by falling home values and bad news headlines
- A collapse of business confidence, caused by the above as well as regime uncertainty
It's quite possible that hypotheses 2 and 3 could be working together.
What's this mean? I'm not convinced that the banking credit crunch is much different than in past recessions. Businesses always have trouble get bank loans in recessions. The tightening of bank lending standards in this recession is similar to the 1990 recession and the 2001 recession, according to the Fed's survey of bank lending officers (to see a chart, hit that link and then "Charts"). The point that data don't support the bank credit crunch hypothesis has been made by others, most notably researchers at the Minneapolis Fed.
It certainly appears that bank lending is not the central problem of this recession. Tim Geithner's huge bank lending program seems unnecessary, given that bank lending isn't the central problem. This is what I wrote for one of my consulting clients in December, before the Obama team took over:
The new Treasury secretary will
be Tim Geithner, currently president of the New York Fed, whose career has
centered around economic crises, including the Mexican crisis and the Asian
financial crisis. He knows crises, and
that’s good, but his instincts are to put together a big bailout rather than
let anyone go under. However, there
really are times when we want to let companies go under. My judgment: his strengths match his