The “crisis” we are told is getting worse. Paul Krugman’s recent column is breathless in its anxiety:
The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.
Around the time of the financial institution bailout, we were told that banks weren’t lending and that nearly every business was in jeopardy since short-term credit is the lifeblood of the economy. That, as flimsy as it seems, was the justification for the massive monetary expansion and subsequent unprecedented interventions.
But for being on the precipice of total collapse and the cusp of a “Great Depression II” I can’t say that I see much evidence of it. There’s increased unemployment, depressed home values, and slowed growth but it’s hard to say that we are in a period worse than the doldrums of the 70s or the recession of the 80s. We are certainly a far cry from the mass unemployment and economic retraction of the 30s. However, it has been difficult to find contrary evidence.
This graph from the St. Louis Federal Reserve is damning—Robert Higgs calls it evidence of the “Great Hoax of 2008.” (Mouse over it to see a close-up of the 11/1/2007–12/24/2009 period. Click to see a bigger version of the long view or this to see a bigger version of the close-up.)
The plateau initially seems to support the Treasury’s story of a liquidity problem. But this is an aggregate of the total credit outstanding at banks. Loans, especially short-term loans, are constantly being retired. If the money was being hoarded, then we would see a downward trend as attrition decreased the total bank credit. A plateau means that retired debt is being lent out again, resulting in a neutral line on net. When the supply of credit increases, the line would trend upward.
So credit wasn’t expanding, but it wasn’t contracting either. In fact, the plateau is at a higher level than at the beginning of 2008 and the entire episode lasted all of six months or so. This is what passes for a crisis that was not to be squandered: justifying calls for over a trillion dollars in new federal spending in order to stave off … nothing.