Federal Reserve Bank of Minneapolis: What Credit Crisis?

This financial crisis has painted a popular view that our economic and financial world seems careened towards perdition; largely underpinned by the blowup in the securitization markets and a freeze in the credit markets. And such is the reason why global governments have united to supposedly provide the intensive care treatment needed to avert a systemic meltdown.

Ironically, what the US Federal Reserve and the US Treasury have been saying runs counter to the insights of the Federal Reserve Bank of Minneapolis. The US government says the system is in danger which requires massive intervention while the Minneapolis implies that there is no systemic threat.

V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe in a recent working paper “Myths about the Financial Crisis of 2008” (HT: Mike Moffatt About.com) disputes much of the woes aired by the experts and the financial press.

From Chari, Christiano and Kehoe,

``Clearly, the United States and the world economy are undergoing a major financial crisis. Interbank borrowing and lending rates have risen to unprecedented levels relative to U.S. Treasury Bills. Several major financial institutions have failed. These real problems have also been associated with four widely-held myths about the nature of the financial crisis and the associated spillovers to the rest of the economy. The financial press and policymakers have made four claims about the nature of the crisis.

1. Bank lending to non financial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by non.nancial 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 Federal Reserve Bank of Minneapolis presents the following charts…

While volume transactions of commercial paper fell dramatically, the non financial market seems to remain buoyant.

Meanwhile 90 day commercial paper rates have zoomed.

Our comment:

On the surface it would appear there hasn’t been much of the dislocation in the credit markets. But if one takes into account the spikes of Interbank 5A, commercial and Industrial loans 3A, Bank Credit 1A and Loans and Leases 2A, they seem coincidental with the US Federal Actions. Perhaps much of the recent gains in these credit activities could have been influenced by Fed policies.

Another possible factor for a spike in the loans is that the compressed activities in the commercial paper market could have prompted corporations to tap their revolving credit lines instead. Or perhaps consumers have used more of the credit card to sustain consumption patterns.

Nonetheless, if the present crisis is viewed from the angle of the US Federal Reserve’s Balance Sheet, the change of its composition and its rapid expansion implies that the crisis isn’t a myth. Chart courtesy of by Federal Bank of Atlanta.

Such dissonance could imply of the concentration of risks in the US banking system to a few but large heavily affected institutions.

As Christopher Whalen (HT: Craig McCarty) of the Institutional Risk Analytics observes, ``Despite grim macro outlook for US economy, most smaller banks in the US are in good shape. While losses will rise for the banking industry as a whole, smaller banks up through large regional institutions have the capital to absorb losses and continue during business. Top five institutions are where the assets are concentrated and the loss rates will be higher as the credit cycle peaks in Q1-2 of 2009.”

Lastly if it is true that today's crisis is a myth then why the need for all these coordinated and intensive intervention? Perhaps to save Wall Street?