Over the past month or so all I hear about is the credit crunch or lack of liquidity that characterizes the financial markets. And so goes, if we don’t free up this liquidity the economy will plunge into a deep recession, never to return!!!
My question isn’t about the legititmacy of these statements but about all of the dam ads I still see about incredibly low mortgage rates. Whether it be on the internet or the tv, every day I encouter an advertisement offering obscenely low interest rates. If the credit crunch is so bad, why aren’t these rates getting higher!!!??
So this question very much interests me. We had one financial analyst actually wage war against Mises.org for failing to point out that dire credit crunch that was going on. I’m no expert but I just wasn’t willing to take his word for it that the sky was falling.
The problem was that obviously retail credit was available, banks were still making loans though with stricter standards, long-run rates were still low, short run rates were absurdly low, credit was all over the place, though of course spreads were changing. Commercial paper were drying up to some extent, which is exactly what you would expect and proof that the market was working in response to government-generated hysteria. Meanwhile, the big banks were still paying dividends, so one wonders, really, just how bad it got.
So far as I could tell, what we were seeing was a repricing. Credit was available at some price. I even tried to look up how many “no bid” contracts were on the market but I found no serious evidence of the end of the world. Meanwhile, a handful of financial guys were saying that we brought disgrace to the Mises Institute for failing to flip out and tell everyone that the end was nigh.
On every interview I’ve done thus far, I’ve ask about the supposed credit crisis and the answer was again confirmed: the market is working to tighten standards, which is what we would expect. So I’ve yet to see any evidence of some sort of fundamental calamity.
Clearly these guys want the propaganda to infiltrate the masses to build support for the socialistic “bailout”. I am glad this site did not follow suit. Where I live, one bank posted a large sign outside the building that stated “We Are Lending Money!” The only “crisis”, is that credit standards are tightening, as they should.
I have seen this data as well. Banks are sitting on tons of cash, which is what I’d be doing too if I’d just lost my shirt on a bunch of empty high rises and one-third-finished subdivisions. So the crisis is only that people who want credit are unwilling to bid for it. This is all part of the correction process. Not to be facile, but vendors, producers and customers will all have to negotiate different terms and be glad for the business in the meantime. The sky is not falling.
So, the market is working to tighten standards, and there is no fundamental calamity: this is the conclusion to draw if we look at the credit markets, where the Federal Reserve points us.
But if we look at the personal savings rate, the producer price index, the monetary base, the federal funds rate, etc., then, at least from an Austrian perspective, the US economy is in irreversible trouble. Is it not just a matter of time before the credit markets reflect this? Was the Federal Reserve savvy enough to see this coming and that is why they strike now?
(Of course, the Austrians are careful not to make detailed predictions about the timing and severity of the bust, but certainly there aren’t many red flags left to raise.)
Correct. It’s not like Scrooge McDuck has filled his personal vault with coin while the masses starve for lack of loanable funds. That’s BS. Banks have plenty of funds available to lend. They just don’t want to lend on the prior, profligate terms.
Yes. Michael Rozeff at LRC is talking hyperinflation, depression, one for the history books, etc., which I’m surprised to see from him. Again, the problem is not a lack of funds available to lend; the problem is the fundamentals of the economy are so awful. Only time and lack of government intervention can cure it. Of course, the government is intervening so the recovery will be delayed.
Rozeff goes on to say the government has to sterilize this jump in the monetary base by selling a whole bunch of new bonds real quick in order to avoid hyperinflation. He doesn’t think they can do it, but isn’t it true people are fleeing into UST’s right now? Is there a link that answers my probably stupid question?