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Don’t Believe the Hype

January 7th, 2009 by Bill Brown · 20 Comments · Politics

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.

20 Comments so far ↓

  • Burgess Laughlin

    As a layman, I am perplexed about evaluating a particular economy at a particular time and place. What methods do objective economists use?

    For example, I would think that it is very important to distinguish essential (causal) characteristics (I don’t know what they are) from nonessential ones (effects). For instance, is unemployment more of an effect than a cause? If so, how much time would pass between the appearance of the cause and a rise in unemployment?

    I don’t know the answers. I welcome a link to any economist who is making objective predictions–e.g., about how much general price rise will occur, and approximately when, as a result of a supposedly massive increase in the money supply. Decades ago, economists sometimes suggested 18 months was an approximate lag for inflationary effects. Does that still hold?

  • GregM

    In my laymen opinion something has to give. How can production/wealth continue to increase when liberty is continually being choked down?

  • $1.2 Trillion Deficit? | THE WEEKLY POINT

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  • Kendall J.

    I too have seen these sort of claims by some economists; however, my layman’s viewpoint would say that an analysis based upon the data that you have shown it leaves me with more quetsions than answers and does not support your conclusion. I’m not suggesting you’re wrong Bill, but rather that getting a handle on magnitude of the issue is complicated, and your analysis doesn’t quite ring true.

    First off, one would only compare look at the *cummulative* credit outstanding if the magnitured of debt retired and debt reissued were of *similar magnitude* to the total outstanding. That is, this is an issue of rates, and your graph doesn’t discuss rates. It’s true that debt is retired everyday, and it is also true that it is reissued. It is also true that one can still get mortgage loans; however, you’ve shown nothing about the relative change in rates during the short time of the last 3 months. It might appear as though the graph changes little but that might just as easily be because the rates realtive to cummulative are very small. This wouldn’t mean that there not some financial distress going on.

    Now, I think there is a ton of “what will happen if we don’t do something” hype out there, but that not the same as saying there is nothing going on in reality in the financial markets.

  • Bill Brown

    That’s a fair point. It could very well be that the churn of debt during that period was insignificant. It could also be true that the churn was primarily happening in long-term debt and there was a shortage of short-term credit—I heard rumblings about that when banks were said to be hesitant about interbank lending due to uncertainty about which banks were in trouble.

    That being said, I have not seen any hard data from the “sky is falling” crowd except anecdotes about businesses having their lines of credit shut off and unemployment figures. Neither of these impressed me as justifying the hyperbole. Maybe I’m not looking in the right places, but I read widely on this subject so I think evidence would have crossed my path at some point.

  • Kendall J.

    Now on that point you are absolutely right. There is no doomsday, there is no end of the world. It is easy to drive people by fear by positing one. Then when you’ve taken some action, and the world hasn’t ended, it is presumed that it was because of the action you took. The reality is that the world was never going to end, and your actions just made things “a little bit” worse.

    I think that part of your post is dead on.

    The banking problem still has not been fixed, and it is having real effects in the greater economy. I think the issue is that if the govt *continues* to act that it will get much worse. That is the real “cliff.”

  • Galileo Blogs

    Keying off of Burgess’s and Kendall’s comments, I also have problems with your conclusion. It is the economic equivalent of using a picture to make an argument. It takes a lot more to make the case that this economic malaise is mild.

    First of all, the chart shows aggregates, not rates of change. Rates of change are often very important in determining other rates of change, such as the rate of change of GDP or employment (both of which are good indicators of recession). To go from a period of steady growth to a flattening can conceal a significant tightening of credit conditions.

    Moreover, other data I quickly pulled up does show a decline in aggregate measures. See the bottom chart on this page showing industrial loans:

    It would also help to obtain this data for a longer period to include other recessions in order to provide a comparison. What pattern shows up during the 2001 recession or the recession of the early 1990s, or earlier recessions? Did the aggregate number merely flatten out or decline slightly in those recessions, as in this one, or did it show a steep decline?

    I agree with your goal of questioning popular hype about the economy, especially when it is used to justify massive government intervention, but your chart does not make the case that the current economic malaise is mild. It may be true, but more evidence is needed to make the case.


    On a side note, the best argument against the bailout is that it violates our rights. Money is stolen from some people and arbitrarily handed out to others. Economically, no new wealth is created, but existing wealth is consumed and wasted on uneconomic projects. To put it simply, the bailout violates our rights and makes us poorer; it is both immoral and impractical. Therefore, it cannot help the economy recover. If/when the economy does recover, it will be despite the bailout, not because of it.

  • Bill Brown

    Here’s the 10-year trend for total bank credit and here’s the trend since 1973 since you asked.

    I never said that this recession is mild or non-existent. I said that it is not a “crisis” and that we are not facing the Great Depression II. If I were trying to argue that we’re not in recession or that things are hunky-dory, I would use a broader set of measures than total bank credit. (Incidentally, the industrial loans graph you point to shows a relatively-stable line until mid-September and then starts declining from a peak in late October. If I remember correctly, those two dates roughly correspond to massive interventions by the Fed in the commercial credit sector.)

    I was also not making the case against the bailout or the stimulus package. I’ve argued against those in previous entries. The financial sector of this country is replete with violations of our rights, from regulations to onerous taxation to political meddling. The government should get out the sector entirely, the sooner the better.

  • Bill Brown

    @GregM: That is my greatest fear in this whole episode. That because of unprecedented federal deficits and manipulations, this will become a self-fulfilling prophecy. It would have been a mild recession like the 2001 one but for Obama and Congress.

  • Galileo Blogs

    Fair enough, I don’t want to mischaracterize your argument. I am more interested in method. Aggregates can be very misleading because they obscure quite significant changes in rates of change. Your longer chart going back to 1973 is a good example. Some quite severe recessions happened within that period, none of which are evident in the aggregate data.

    However, other data showing rates of change, such as unemployment rates, or rates of change of GDP or, perhaps, rates of change in loans or other financial data would demonstrate the severity of the recessions that occurred during that period.

    Incidentally, as I’m sure you know, unemployment peaked at some 28% during the Great Depression. To say we are in the midst of a similar depression now is ludicrous, although it does not rule out the possibility that our recession may become one. Moreover, as you point out, the Great Depression was made “Great” by the huge interventions of Hoover and FDR that made it so severe. Obama is proposing some similar interventions that could get us there, although still not nearly as egregious as those of Hoover/FDR.

  • Bill Brown

    I believe that every recession has some superficial differences. For example, previous recessions may have had (or may have lacked) credit contractions or higher unemployment. The technical measure of a recession—”two consecutive quarters of negative growth”—doesn’t indicate how that negative growth might play out. I don’t remember enough about previous recessions (and can’t investigate more deeply right now) to say whether they were marked by credit contraction.

    Here’s the same period as a rate of change, expressed in billions or as a percent. It’s definitely more volatile, as I would expect, but shows basically the same trend.

  • Jim May

    The general consensus I’ve heard from Austrians and Austrian-like economic pundits is that we are paying the price now for the fact that the 2001 recession should have been larger than it was.

    Regarding the speed of events, I’m not sure about that now. With computer trading worldwide, certain aspects of propagation are far faster than before. I’ve been wondering whether this might speed up the spread of inflation, which in the past has shown lags as long as decades (e.g. the inflation that peaked in Jimmy Carter’s administration had its roots in LBJ’s “Great Society” and the costs of the Vietnam War, and the inflation born of WWII eventually showed up in the early 1950’s).

    Regarding the credit crunch, one of the areas commonly cited as being squeezed is credit cards. If you head over to the Finance section of, you’ll get a near real-time update on what’s happening there; many members of that board have and seek large amounts of credit at low or 0 rates, in order to engage in arbitrage (borrow at 0%, park the funds in interest-earning vehicles, then repay the cards and keep the interest).

    Some credit card companies are indeed slashing lines. However, usually this is happening to inactive/unused cards, to people with FICO credit below 720, and at the hands of companies experiencing a crunch (American Express was slashing lines all over the place before they “became a bank” and received bailout funds). Some of the arbitrageurs over there are seeing “adverse action” (lines cut, accounts closed) but many are not.

    I concur that the government may still turn all of this into something far larger and more destructive than it would be if they got out of the way. The big difference to me is that FDR devalued (inflated) the currency in one big step in gold terms in 1933, but left it linked to gold afterwards. His modern heirs — unconstrained by any link at all since 1971 — will do so continually.

    I therefore expect government debt–>inflation to be the dominant conduit of wealth confiscation this time around, not government debt–>taxes as in the 1930’s.

  • Bill Brown

    The Congressional Budget indicated today that this year’s federal deficit will top $1.2 trillion. And that’s before the stimulus package that will, by all measures, hover near another trillion. It says that that’s a 8.3% share of GDP. 8.3% of our economy is being forcibly redistributed by the federal government. Crikey!

  • Inspector

    Two comments:

    1) Is that graph adjusted for inflation?

    2) It appears to me as if some here are confusing overall economic health with credit. To say that credit has been sufficient is not to say that the economy has been healthy. Supposing Bill’s point that credit is not in need of fixing were true – it would still remain possible that the economy is in bad shape and that attempts to “fix” credit are only making the overall economy worse.

  • Bill Brown

    I could find nothing aside from “seasonal adjustment.” In the absence of such a legend, you’d have to assume that it is not adjusted for inflation.

    My interest in this blog entry is mostly in the phenomenon of oft-repeated assertions that build on top of each other without anyone’s supporting them with real data. I found one piece of data that suggests that one of those assertions appears hyperbolic; I would not extrapolate from that any further conclusions about the health of the economy.

  • Inspector

    I mentioned it because most of the replies to your point addressed the health of the economy as a whole, and not the specific area of credit which you were addressing, Bill. It’s quite possible that the one could be healthy and the other not.

  • Bill Brown

    I know. I just wanted to be as explicit as possible for the dear readers.

  • Bill Brown

    I didn’t read the CBO report like I should have. Apparently, it predicts federal outlays to top $4 trillion—$1.2 trillion of which will be over tax receipts. It’s seriously out of control.

  • Inspector

    Oh… Oh my.

    That isn’t good. That isn’t good at all.