I’ve blogged about this before here and here. There seems to be a disconnect between what the Fed and Treasury are telling us about credit conditions and the data that is compiled by the Fed about credit. Reuters has a story today about a study by Celent that comes to the conclusion that the credit crunch is largely confined to a few large firms:
PARIS (Reuters) – The credit crunch is not nearly as severe as the U.S. authorities appear to believe and public data actually suggest world credit markets are functioning remarkably well, a report released on Thursday says.
As a result, governments are pumping masses of public money into the economy across the world because of the difficulties of a few big, vocal banks and industries such as car manufacturing, which would be in difficulty anyway, according to the report published by Celent, a financial services consultancy.
“It’s just stabbing in the dark with trillions of dollars,” Octavio Marenzi, report author and head of Celent, told Reuters in a telephone interview where he questioned the depth of the analysis that preceded numerous fiscal stimulus packages.
This seems largely accurate to me. The vast majority of the banks in the US did not participate in the sub prime mania. For that matter, most of the country didn’t participate in the real estate bubble. The housing bubble was concentrated in the so called “sand states” of CA, AZ, NV and FL. There is some data that supports the Fed’s contention that credit is tight. The excess reserves held by banks at the Fed has soared:
These excess reserves usually get lent out by banks but with the Fed paying 1% on these deposits, banks are choosing to leave their excess parked at the Fed. Maybe if the Fed stopped paying interest on those reserves, the banks would lend them? Just a thought…
The authors of the report are shocked:
“It is startling that many of (Federal Reserve) Chairman (Ben) Bernanke and (Treasury) Secretary (Henry) Paulson’s remarks are not supported or are flatly contradicted by the data provided by the very organizations they lead,” said the report.
Perhaps the U.S. central bank and treasury department, and authorities in other countries by extension, know something they are not telling anyone and which is far more worrying than the public data shows, the report says.
Or, more plausibly, they were generalizing erroneously from the bad experience of a limited number of big banks and companies that are in any case in difficulty.
“I don’t think they’re fabricating stuff but what I think they are doing is taking the situation of a handful of institutions and generalizing that to the market as a whole, incorrectly,” said Marenzi.
I’m not shocked. Hayek warned about this years ago in The Road to Serfdom . The ability of central planners to gather and process all the information required to make wise decisions is just impossible. The basic thesis of the book was that one intervention inevitably leads to another as the unintended consequences distort the market and that requires more intervention. That certainly sounds like what has happened over the last 18 months.
The conclusion of the report:
All of which drove the Celent report to conclude that the U.S. and other governments may be throwing good money after bad for want of a better idea of what is really happening.
“Just like a doctor contemplating an obviously sick and suffering patient, a massive surgical intervention based on a misdiagnosis can only worsen the patient’s condition.”
If there is a lack of lending, I believe it is due to what Robert Higgs calls regime uncertainty. That uncertainty was produced by the serial interventions of Bernanke and Paulson. There is a lack of willingness on the part of some banks to lend and a lack of willingness to borrow on the part of many corporations and consumers brought on by the uncertainty surrounding what Bernanke and Paulson will do next. Paulson at least will be gone in January. Bernanke, unfortunately, we’ll have to live with for a while longer.
We would be well along with the recovery had Bernanke and Paulson been locked up 18 months ago. Bernanke started the problem with the TAF introduced a little over a year ago which allowed banks to borrow from the Fed anonymously. That anonymity is what started the ball rolling. With no way to identify the troubled banks, interbank lending started to dry up. The more Bernanke intervened the worse the problem got. Then starting with the Bear Stearns deal, a new uncertainty was introduced. Will they bail out Fannie and Freddie? Yes. Will they bail out AIG? Yes. Will they bail out Lehman? No! What?!!! Will they bail out Citigroup? Yes! No wonder no one wants to invest. You don’t know what the government will do next.
I’m not sure how Bernanke will ever extract the Fed from the market but that is the key to getting the credit markets functioning normally again. Maybe a new Fed chairman with more credibility could do it, but I’m not sure Larry Summers, Obama’s heir apparent for the Fed, is that man. In any case, we won’t find out until 2010.