Myths About The Financial Crisis Of 2008
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Federal Reserve Bank of Minneapolis Research Department
Myths about the Financial Crisis of 2008∗ V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe Working Paper 666 October 2008
ABSTRACT We show that four widely-held beliefs about the financial crisis of 2008 are false.
∗
Chari, University of Minnesota and Federal Reserve Bank of Minneapolis; Christiano, Northwestern University and the Federal Reserve Bank of Minneapolis; Kehoe, Federal Reserve Bank of Minneapolis, University of Minnesota, and NBER. All three authors thank the NSF for support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Clearly, the United States and the world economy are undergoing a major …nancial crisis. Interbank borrowing and lending rates have risen to unprecedented levels relative to U.S. Treasury Bills. Several major …nancial institutions have failed. These real problems have also been associated with four widely-held myths about the nature of the …nancial crisis and the associated spillovers to the rest of the economy. The …nancial press and policymakers have made four claims about the nature of the crisis. 1. Bank lending to non…nancial 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. Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false1 . Figure 1A displays weekly data on the total amount of bank credit for all U.S. commercial banks from 2001 onwards. Figure 1B displays the same data from the beginning of 2008 onwards. Bank credit consists of the aggregate amount of assets held by these banks excluding vault cash. As is clear from these …gures bank credit has not declined during the …nancial crisis. Indeed, bank credit appears to have risen relative to trend in the month of September. Figures 2A and 2B display analogous data for loans and leases made by U.S. commercial banks. Again, we see no evidence of any decline during the …nancial crisis. Figures 3A and 3B display data for commercial and industrial loans. Again, we see no evidence that the …nancial crisis has a¤ected lending to non…nancial businesses. Figures 4A and 4B
display data for consumer loans and show no evidence that the …nancial crisis has a¤ected consumer lending. These …gures show that the …rst claim, that banks have stopped lending to nonbank entities and individuals is false, at least in the aggregate as of October 8. Figures 5A and 5B display data for interbank loans made by all U.S. commercial banks. These …gures show that, at least in the aggregate, interbank lending is healthy. The second claim, that the volume of interbank lending has fallen sharply is false, at least as of October 8. Figures 6A and 6B display data for the stock of commercial paper outstanding for …nancial and non…nancial corporations. These …gures show that, while commercial paper issued by …nancial institutions has declined, commercial paper issued by non…nancial institutions is essentially unchanged during the …nancial crisis. Figures 7A and 7B display data for the interest rate on commercial paper with a maturity of 90 days for …nancial and non…nancial corporations. These …gures show that, during the …nancial crisis, this interest rate has risen for …nancial institutions and has barely budged for non…nancial institutions. Note that, even though the interest rates for …nancial institutions has risen recently, it is still well below the levels that prevailed from the beginning of 2006 to the middle of 2007. These …gures show that the …nancial crisis has not led commercial paper rates to rise to levels well beyond historical levels. Taken together Figures 6 and 7 show that the third claim is false, at least as of October 8. We now turn to data from the Federal Reserve Board’s Flow of Funds Accounts. These data allow us to analyze the claim that bank lending to non…nancial corporate businesses constitutes the bulk of borrowing of these businesses. Banks lend directly to such businesses 2
and indirectly by holding publicly traded bonds to these businesses. In the second quarter of 2008, an upper bound for such bank lending is approximately $1 trillion. Non…nancial corporate businesses obtain funds from banks and by issuing publicly traded bonds that are held by nonbank …nancial institutions such as life insurance companies as well as directly by households. The total amount of such funds is approximately $4.5 trillion. Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of non…nancial businesses to borrow from households is highly questionable.
3
Fig 1A: Bank Credit 10000
9000
billions
8000
7000
6000
5000 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 1B: Bank Credit (weekly 2008) 10000
9000 Lehman Bros fails
billions
8000 Bailout plan proposed
Bear Stearns fails 7000
WaMu fails
6000
Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
5000
Fig 2A: Loans and Leases 8000
7000
billions
6000
5000
4000
3000 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 2B: Loans and Leases (weekly 2008) 8000
7000
6000
billions
Lehman Bros fails
Bear Sterns fails
Bailout plan proposed
5000 WaMu fails
4000 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
3000
Fig 3A: Commercial and Industrial Loans 1600
billions
1400
1200
1000
800 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 3B: Commercial and Industrial Loans (weekly 2008)
1600
1400
billions
Lehman Bros fails Bear Sterns fails 1200
Bailout plan proposed
WaMu fails
1000 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
800
Fig 4A: Consumer Loans 900
billions
800
700
600
500 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 4B: Consumer Loans (weekly 2008) 900
800
billions
Lehman Bros fails Bear Sterns fails 700 Bailout plan proposed
WaMu fails 600 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
500
Fig 5A: Interbank Loans 600
billions
500
400
300
200 2001
2002
2003
2004
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2005
2006
2007
2008
Fig 5B: Interbank Loans (weekly 2008) 600
Lehman Bros fails
billions
500
400 Bailout plan proposed
Bear Sterns fails
WaMu fails
300
Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
200
Fig 6A: Commercial Paper Outstanding 900
800
700
Financial
billions
600
500
400
Nonfinancial 300
200
100 2001
2002
2003
2004
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2005
2006
2007
2008
Fig 6B: Commercial Paper Outstanding (weekly 2008) 900
800 Financial 700
billions
600
Lehman Bros fails
500
Bear Sterns fails
Bailout plan proposed
400
WaMu fails
300 Nonfinancial
Wachovia is taken over
200
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
100
Fig 7A: Commercial Paper 90 Day Rate 6
5
4
3
2
Financial
Nonfinancial
1
0 2001
2002
2003
2004
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2005
2006
2007
2008
Fig 7B: Commercial Paper 90 Day Rate (weekly 2008) 6
5 Bear Sterns fails 4
Lehman Bros fails Financial Bailout plan proposed
3
2 Nonfinancial WaMu fails 1 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
0
Myths about the Financial Crisis of 2008∗ V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe Working Paper 666 October 2008
ABSTRACT We show that four widely-held beliefs about the financial crisis of 2008 are false.
∗
Chari, University of Minnesota and Federal Reserve Bank of Minneapolis; Christiano, Northwestern University and the Federal Reserve Bank of Minneapolis; Kehoe, Federal Reserve Bank of Minneapolis, University of Minnesota, and NBER. All three authors thank the NSF for support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
Clearly, the United States and the world economy are undergoing a major …nancial crisis. Interbank borrowing and lending rates have risen to unprecedented levels relative to U.S. Treasury Bills. Several major …nancial institutions have failed. These real problems have also been associated with four widely-held myths about the nature of the …nancial crisis and the associated spillovers to the rest of the economy. The …nancial press and policymakers have made four claims about the nature of the crisis. 1. Bank lending to non…nancial 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. Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false1 . Figure 1A displays weekly data on the total amount of bank credit for all U.S. commercial banks from 2001 onwards. Figure 1B displays the same data from the beginning of 2008 onwards. Bank credit consists of the aggregate amount of assets held by these banks excluding vault cash. As is clear from these …gures bank credit has not declined during the …nancial crisis. Indeed, bank credit appears to have risen relative to trend in the month of September. Figures 2A and 2B display analogous data for loans and leases made by U.S. commercial banks. Again, we see no evidence of any decline during the …nancial crisis. Figures 3A and 3B display data for commercial and industrial loans. Again, we see no evidence that the …nancial crisis has a¤ected lending to non…nancial businesses. Figures 4A and 4B
display data for consumer loans and show no evidence that the …nancial crisis has a¤ected consumer lending. These …gures show that the …rst claim, that banks have stopped lending to nonbank entities and individuals is false, at least in the aggregate as of October 8. Figures 5A and 5B display data for interbank loans made by all U.S. commercial banks. These …gures show that, at least in the aggregate, interbank lending is healthy. The second claim, that the volume of interbank lending has fallen sharply is false, at least as of October 8. Figures 6A and 6B display data for the stock of commercial paper outstanding for …nancial and non…nancial corporations. These …gures show that, while commercial paper issued by …nancial institutions has declined, commercial paper issued by non…nancial institutions is essentially unchanged during the …nancial crisis. Figures 7A and 7B display data for the interest rate on commercial paper with a maturity of 90 days for …nancial and non…nancial corporations. These …gures show that, during the …nancial crisis, this interest rate has risen for …nancial institutions and has barely budged for non…nancial institutions. Note that, even though the interest rates for …nancial institutions has risen recently, it is still well below the levels that prevailed from the beginning of 2006 to the middle of 2007. These …gures show that the …nancial crisis has not led commercial paper rates to rise to levels well beyond historical levels. Taken together Figures 6 and 7 show that the third claim is false, at least as of October 8. We now turn to data from the Federal Reserve Board’s Flow of Funds Accounts. These data allow us to analyze the claim that bank lending to non…nancial corporate businesses constitutes the bulk of borrowing of these businesses. Banks lend directly to such businesses 2
and indirectly by holding publicly traded bonds to these businesses. In the second quarter of 2008, an upper bound for such bank lending is approximately $1 trillion. Non…nancial corporate businesses obtain funds from banks and by issuing publicly traded bonds that are held by nonbank …nancial institutions such as life insurance companies as well as directly by households. The total amount of such funds is approximately $4.5 trillion. Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of non…nancial businesses to borrow from households is highly questionable.
3
Fig 1A: Bank Credit 10000
9000
billions
8000
7000
6000
5000 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 1B: Bank Credit (weekly 2008) 10000
9000 Lehman Bros fails
billions
8000 Bailout plan proposed
Bear Stearns fails 7000
WaMu fails
6000
Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
5000
Fig 2A: Loans and Leases 8000
7000
billions
6000
5000
4000
3000 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 2B: Loans and Leases (weekly 2008) 8000
7000
6000
billions
Lehman Bros fails
Bear Sterns fails
Bailout plan proposed
5000 WaMu fails
4000 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
3000
Fig 3A: Commercial and Industrial Loans 1600
billions
1400
1200
1000
800 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 3B: Commercial and Industrial Loans (weekly 2008)
1600
1400
billions
Lehman Bros fails Bear Sterns fails 1200
Bailout plan proposed
WaMu fails
1000 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
800
Fig 4A: Consumer Loans 900
billions
800
700
600
500 2001
2002
2003
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2004
2005
2006
2007
2008
Fig 4B: Consumer Loans (weekly 2008) 900
800
billions
Lehman Bros fails Bear Sterns fails 700 Bailout plan proposed
WaMu fails 600 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
500
Fig 5A: Interbank Loans 600
billions
500
400
300
200 2001
2002
2003
2004
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2005
2006
2007
2008
Fig 5B: Interbank Loans (weekly 2008) 600
Lehman Bros fails
billions
500
400 Bailout plan proposed
Bear Sterns fails
WaMu fails
300
Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
200
Fig 6A: Commercial Paper Outstanding 900
800
700
Financial
billions
600
500
400
Nonfinancial 300
200
100 2001
2002
2003
2004
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2005
2006
2007
2008
Fig 6B: Commercial Paper Outstanding (weekly 2008) 900
800 Financial 700
billions
600
Lehman Bros fails
500
Bear Sterns fails
Bailout plan proposed
400
WaMu fails
300 Nonfinancial
Wachovia is taken over
200
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
100
Fig 7A: Commercial Paper 90 Day Rate 6
5
4
3
2
Financial
Nonfinancial
1
0 2001
2002
2003
2004
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
2005
2006
2007
2008
Fig 7B: Commercial Paper 90 Day Rate (weekly 2008) 6
5 Bear Sterns fails 4
Lehman Bros fails Financial Bailout plan proposed
3
2 Nonfinancial WaMu fails 1 Wachovia is taken over
Source: Federal Reserve Board http://www.federalreserve.gov/releases/h8/Current/
10/08
09/24
09/10
08/27
08/13
07/30
07/16
07/02
06/18
06/04
05/21
05/07
04/23
04/09
03/26
03/12
02/27
02/13
01/30
01/16
01/02
0
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