"Some of the Conclusions Drawn are Simply False"

Pushback against this:

Analysis!, Free Exchange: If you have been paying attention to the news, to financial experts, to economists ... then you may have heard that there have been some recent problems...

Alex Tabarrok ... has been pushing the argument that we may face recession, but that the financial crisis never threatened the real economy, and so the big government bail-outs were unnecessary. And now he has proof. Three economists from the research department of the Federal Reserve Bank of Minneapolis have produced a working paper purporting to debunk four myths about the financial crisis. Those myths are:

1. Bank lending to non-financial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by non-financial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.

The authors of the paper next provide a damning analysis. In the best tradition of lazy undergraduates everywhere, they plot lines on graphs and draw wild conclusions. And on the basis of these conclusions, Mr Tabarrok writes his post, and credulous bloggers begin analogising the bail-out to the Bush administration's bogus claims about Iraq's weapons of mass destruction.

There are a few problems with all of this. First of all, some of the conclusions drawn are simply false. While rates on the highest quality non-financial commercial paper have behaved fairly well in recent weeks, rates for lower quality stuff have soared. The spread between the two, actually, is one of Calculated Risk's credit market indicators.

The failure to distinguish between the two types of paper is indicative of the broader, unwarranted credulity of the authors. For instance, many of the series they present actually show an unusual spike in bank lending during the crisis period. Are we to understand that for most banks, conditions actually improved, suddenly, sharply, and atypically while the rest of the financial world went to hell? Well, we might do that. Or we might suspect that the increase in bank lending was itself a product of tight credit conditions elsewhere—that borrowers were falling back onto lines of credit they normally wouldn't use thanks to the severity of lending conditions.

And of course, there is the inconvenient matter that the Federal Reserve and the Treasury went out and did all that stuff they did in order to prevent a massive breakdown in lending to the real economy. ... Now this does allow sceptics to say, "Well, how do we know things would have collapsed"? We don't, of course, but that doesn't change the fact that current lending takes into account massive government intervention to make sure that lending continued. The latter therefore can't be used to argue that the former wasn't necessary.

Maybe at some point we'll see some careful research that suggests that the threat the financial crisis posed to the real economy was drastically oversold. This, I'm afraid, isn't it.

Consider Figure 2B from their paper:

Here is their entire analysis of what this shows:

Figures 2A and 2B display analogous data for loans and leases made by U.S. commercial banks. Again, we see no evidence of any decline during the financial crisis.

Here's what I see. The bump in loans between September 10 and September 17 was probably this (9/14):

Federal Reserve Board announces several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities

• Press release
• Interim final rule -- Federal Register notice: 53 KB PDF | TEXT
• Primary Dealer Credit Facility
• Term Securities Lending Facility
  Related Statements by Other Agencies
• U.S. Department of the Treasury
• U.S. Securities and Exchange Commission
      September 15, 2008
      September 14, 2008

Then, we see the Lehman collapse, and this caused the Fed induced substitute lending to fall off from 9/17 to 9/24. Next, after the bailout plan is proposed lending takes off again (see the change between 9/24 and 10/1), but then it falls off again and turns negative after WaMu fails (see the change between 10/1 and 10/8). I don't see how you can look at this figure and come to the conclusion that there have been no disturbances in financial markets from the crisis generally, or from specific events.

And here's figure 2A which shows the same data since 2001:

Yep, no sign of any changes due to financial market problems and then recovery after Fed action in that series.

These three economists, V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe, have done some excellent work in the past, and I expect better than this. Disclaimer or not, the first thing you see when you open the paper is "Federal Reserve Bank of Minneapolis Research Department," and this reflects poorly on the Minnesota Fed.

[Update: See also Credit Crunch: Did We Make It All Up?. Also: The Credit Crunch Isn't a Myth.]

Update: Evidence on the quantity of loans.