If you are looking for something to listen to while cooking your frank and beans or cabbage stew, this is a good:
(to access the episode for free, click "Full Episode" in the sidebar under the picture of the crumpled dollar bill)
http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1242
Tuesday, February 24, 2009
Thursday, February 19, 2009
What Credit Crisis?
The current economic turmoil is often described as a "credit crisis." The term implies that financial institutions are increasingly unwilling or unable to lend money to companies and individuals. The unfortunate result is that because borrowing money is more difficult, consumers spend less on items like new cars and companies spend less on investment. This causes the economy to contract, causing layoffs and losses in financial markets. This is a reasonable line of thinking. And it is probably the most important argument used to justify the use of trillions of taxpayer dollars to bailout Wall Street. The theory that Main Street will suffer if Wall Street does not extend sufficient credit to borrowers has been the central tenet of recent economic policy. It explains why our deeply indebted government has given trillions of dollars to failing financial institutions staffed by some of the world's wealthiest people. It is the heart of the reasoning behind the bailout.
But there is a problem with this analysis. The "credit crisis" does not exist, at least not in the way many politicians suggest. Everyone talks about the credit crisis. I know. Surely there is a credit crisis, right? It turns out that for many people and companies, borrowing money is not especially difficult these days. In fact, many borrowers can access money at lower interest rates than has been possible for many years.
Here are a few quick facts about credit:
- Mortgage rates for borrowers with good credit are exceptionally low. Since 1992, mortgage rates have only been as low as they are today for a brief few months in 2003.
- The yields paid by corporations to borrow money in the credit markets are not especially high. According to data on long maturity AAA-rated corporate bonds from the St. Louis branch of the Federal Reserve, yields averaged above 6.50% for the decade starting in 1990. At times they were above 8%. Today they are under 6.50%. This is higher than they have been in recent years (when credit was especially easy), but it is hardly unprecedented or inconsistent with periods of economic growth. Much attention has been given to the spread between the yields on ultra-safe investments like U.S. Treasury bonds and riskier corporate bonds. This spread is indeed quite high. But such analysis ignores the fact that treasury yields are near record lows. It does not mean that corporations must pay a high rate to borrow money.
- It is true that the use of credit is declining. Households and companies are borrowing less, which results in less spending and investment, causing the economy to slow. However, this cannot simply be attributed to a credit crisis stemming from Wall Street's toxic assets. Rather, a recent Federal Reserve report indicates that demand for credit is sharply lower (http://www.federalreserve.gov/boarddocs/snloansurvey/200902/default.htm). Consumers and companies do not want to borrow as much money as they have in the past.
So, it is not especially difficult to borrow money these days. For some borrowers, credit is tighter than it has been in recent years. For others, money comes cheap. But to describe the current situation as a "credit crisis" is to gloss over important facts. Money is available to many borrowers on very reasonable terms. And the slowdown in borrowing and economic activity has a lot to do with a decline in demand - as opposed to just the troubles on Wall Street. The policy implications of these facts are important. If credit is indeed available to borrowers, why are we risking so much taxpayer money to help certain financial institutions on such generous terms? Furthermore, almost everyone seems to agree that our economic troubles stem from a frenzy of irresponsible lending and borrowing. Isn't a contraction in credit therefore a good thing?
But there is a problem with this analysis. The "credit crisis" does not exist, at least not in the way many politicians suggest. Everyone talks about the credit crisis. I know. Surely there is a credit crisis, right? It turns out that for many people and companies, borrowing money is not especially difficult these days. In fact, many borrowers can access money at lower interest rates than has been possible for many years.
Here are a few quick facts about credit:
- Mortgage rates for borrowers with good credit are exceptionally low. Since 1992, mortgage rates have only been as low as they are today for a brief few months in 2003.
- The yields paid by corporations to borrow money in the credit markets are not especially high. According to data on long maturity AAA-rated corporate bonds from the St. Louis branch of the Federal Reserve, yields averaged above 6.50% for the decade starting in 1990. At times they were above 8%. Today they are under 6.50%. This is higher than they have been in recent years (when credit was especially easy), but it is hardly unprecedented or inconsistent with periods of economic growth. Much attention has been given to the spread between the yields on ultra-safe investments like U.S. Treasury bonds and riskier corporate bonds. This spread is indeed quite high. But such analysis ignores the fact that treasury yields are near record lows. It does not mean that corporations must pay a high rate to borrow money.
- It is true that the use of credit is declining. Households and companies are borrowing less, which results in less spending and investment, causing the economy to slow. However, this cannot simply be attributed to a credit crisis stemming from Wall Street's toxic assets. Rather, a recent Federal Reserve report indicates that demand for credit is sharply lower (http://www.federalreserve.gov/boarddocs/snloansurvey/200902/default.htm). Consumers and companies do not want to borrow as much money as they have in the past.
So, it is not especially difficult to borrow money these days. For some borrowers, credit is tighter than it has been in recent years. For others, money comes cheap. But to describe the current situation as a "credit crisis" is to gloss over important facts. Money is available to many borrowers on very reasonable terms. And the slowdown in borrowing and economic activity has a lot to do with a decline in demand - as opposed to just the troubles on Wall Street. The policy implications of these facts are important. If credit is indeed available to borrowers, why are we risking so much taxpayer money to help certain financial institutions on such generous terms? Furthermore, almost everyone seems to agree that our economic troubles stem from a frenzy of irresponsible lending and borrowing. Isn't a contraction in credit therefore a good thing?
Wednesday, February 18, 2009
Introduction: If I Had a Trillion Dollars
If I had a trillion dollars, I would not give it to Wall Street.
Until a few months ago, such an introduction would seem ridiculous because it was so obvious that it need not be stated. In February 2009, however, opposing trillion dollar handouts to the financial industry is the work of rebels. The mainstream debate in Washington and on CNBC is not about whether giving Wall Street so much money is a good idea. Rather, the debate centers around the question of how we should give Wall Street the money. It is all but given that we are supposed to hand over the cash. In just a few months, the obvious has become the preposterous.
In subsequent posts I will offer my perspective on the government's various Wall Street bailouts. Hopefully, this perspective will help people to challenge the notion that we should be pumping so much money into Wall Street on such generous terms. At times, I will veer off course and comment about other economic events.
A few words about myself: I am a fixed income trader. I graduated from Princeton University in 2004 with an undergraduate degree in American history. Barack Obama got my vote. And I live in Philadelphia, PA.
Nothing written here represents the views of my employer.
Thanks for checking out my my blog. Please do not be shy about sharing your thoughts.
Until a few months ago, such an introduction would seem ridiculous because it was so obvious that it need not be stated. In February 2009, however, opposing trillion dollar handouts to the financial industry is the work of rebels. The mainstream debate in Washington and on CNBC is not about whether giving Wall Street so much money is a good idea. Rather, the debate centers around the question of how we should give Wall Street the money. It is all but given that we are supposed to hand over the cash. In just a few months, the obvious has become the preposterous.
In subsequent posts I will offer my perspective on the government's various Wall Street bailouts. Hopefully, this perspective will help people to challenge the notion that we should be pumping so much money into Wall Street on such generous terms. At times, I will veer off course and comment about other economic events.
A few words about myself: I am a fixed income trader. I graduated from Princeton University in 2004 with an undergraduate degree in American history. Barack Obama got my vote. And I live in Philadelphia, PA.
Nothing written here represents the views of my employer.
Thanks for checking out my my blog. Please do not be shy about sharing your thoughts.
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