One of the mysteries of this “credit crunch” is why credit worthy individuals can get credit but large corporations supposedly can’t. I’ve seen a parade of community bankers on CNBC saying that things are business as usual. People with good credit and a sufficient downpayment can get a mortgage. The same is true of a car loan. So is it really true that corporations can’t get financing? Is the commercial paper market really “seized up”. Robert Higgs doesn’t think so:
Unless the Fed’s system of collecting information on issuances of commercial paper has gone completely bonkers, however, all these claims are wildly off the mark. Looking at the data for the first four business days of the past week, I find that firms sold from $179 billion to $205 billion of commercial paper per day; the number of separate issuances per day ranged from 6,761 to 7,298. Both the total amount borrowed and the number of issuances per day increased steadily throughout the week (data for Friday have not yet been reported).
It is true that the bulk of the activity in this credit market has occurred recently at the very short-term end. On Thursday, for example, 1-4 day funds accounted for 79% of the value and 71% of the issuances. But this concentration at the short-term end of the spectrum is not particularly a characteristic of a current “credit crunch.” In 2007, for example, on average, 69% of the value and 62% of the issuances came from deals for 1-4 day funds.
At the other end of the term spectrum, on Thursday (the most recent day currently reported), for example, 10% of the value and 11% of the issuances came from deals with terms of 21 days or longer. In 2007, on average, the corresponding figures were 21% and 24%, respectively. So, yes, the commercial paper market has moved recently toward the short-term end, but it is not true either (1) that no commercial paper is being sold or (2) that it is being sold, but only for very short terms.
So what does this mean? Is there a credit crunch or not? I continue to believe that there is a credit crunch only for poor credit risks. That’s something that needed correcting and the market seems to be doing a fine job of it. Poor credit risks should have problems borrowing money.
The effect on the economy is hard to judge at this point, but if you take away a large pool of “consumers” who can no longer borrow to fund their consumption, the effect is unlikely to be benign. It is what needs to happen though. The vast majority of Americans are responsible with their spending and credit. They will now have to pay the price for those who weren’t. That is not capitalism and it isn’t right.