A short, must-read working paper from Kehoe, Chari and Christiano - Myths about the Financial Crisis of 2008. The four myths are as follows:
- Bank lending to non…nancial corporations and individuals has declined sharply.
- Interbank lending is essentially nonexistent.
- Commercial paper issuance by non-financial corporations has declined sharply and rates have risen to unprecedented levels.
- Banks play a large role in channeling funds from savers to borrowers.
Comments
I’m not a doomsdayer, but some of his points seem stretched to me – if not patently biased.
Re: point 1, no one is saying this has happened YET to my knowledge. What they are saying is that it could likely happen if something is not done now to re-capitalize banks and to spark liquidity. They are being disingenuous.
Re: point 2, Many banks I’m sure are lending, but I don’t know if you’ve ever listened to NPR’s “Money” Podcast, but they go on-site to interbank lenders and up until a week or so ago, lots of people wanted to borrow but nobody wanted to lend (except for the least riskiest loans). Maybe the problem is overblown by some analysts and the media, but there definately has been a decline (unless you believe Bernanke is lying to everyone for no reason). No one is saying it’s non-existant. They are again being disingenuous.
His point that 80% of savings is held by households and non-bank financial institutions (point 4) may be true, but I think most everyone that has talked about the crisis means to include such financial institutions under the umbrella of ‘banking.’ They may not be commercial banks but most are heavily tied in some form or fashion to commercial banks, and many have corporate structures such that one company arm may be banking, the other may be financial investments etc. If one arm is cut off, that puts strain on the other. Besides, many non-banking institutions were investors that bought the bad securitized mortgages. That is just as problematic.