Monday, October 27, 2008

Somebody, quick, shut the Minneapolis Fed up

The Federal Reserve Bank of Minneapolis recently issued a white paper titled Facts and Myths about the Financial Crisis of 2008. It is only six pages of text followed by a bunch of graphs. Here are the "Myths":

1. Bank lending to nonfinancial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.

4. Banks play a large role in channelling funds from savers to borrowers.

The authors of the report, V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe, review aggregate financial data compiled by the Federal Reserve and conclude that none of the above statements is true. In other words, there is lending going on between banks, to businesses and individuals, and that businesses do have other available means of credit.

Of course, the authors acknowledge that "[t]he United States is indisputably undergoing a financial crisis." But they are questioning the "bold action" that is being pushed. Their conclusion, set out in as blunt language as you are likely to see from a Federal Reserve Bank, is this:

Our analysis has raised questions about the claims made for the mechanism whereby the financial crisis is affecting the overall economy. We emphasize that we do not dispute that the United States is undergoing a financial crisis and that the United States economy may be in a recession or may experience one in the near future. 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 considred here. If so, responsible policymaking requires that they share both the data and the analysis that underlies the need for bold policy with the public.
(Emphasis added)

What interested me was that, from a big picture standpoint, lending is going on quite well during this crisis. It struck me that the only institutions that were having trouble getting financing were the big banks holding suspect assets. Regional and smaller banks are doing fine. (Which answers my late recurring question: if there is no money to lend, why are we still subjected to all these advertisements for refinancing?)

So what is the bailout all about? I think it has to do with helping Wall Street (and big Wall Street at that), rather than Main Street. That's just what the pitchfork people who wrote their representatives at the first vote thought all along. In any event, the Minneapolis Federal Reserve Bank is obviously not playing the same tune as the world fixers.

More commentary here.

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