By Barbara Kiviat Wednesday, Dec. 24, 2008
Back in September, V.V. Chari, an economist at the University of Minnesota and an adviser to the Federal Reserve Bank of Minneapolis, got a call from a Congressman. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were arguing that they needed $700 billion to save the nation’s financial system, and the Congressman wanted to know what to make of it all. Chari said he didn’t know — he hadn’t looked at the data. Policymakers kept talking about how banks weren’t lending to businesses or to individuals or even to each other, so Chari pulled numbers to see just how badly the credit markets were frozen. He was surprised: he didn’t see much of anything wrong.
Is there a credit crunch? Was there ever? Those questions may seem absurd. Throughout the autumn, the interest rate banks charge each other broke one record after another as trust between institutions evaporated, investors stashed so much cash in super-safe Treasuries that yields approached zero, and the private securitization market for mortgages, which keeps capital flowing for more home loans, disappeared.
But during all of that, there was also persistent anecdotal evidence that lending to credit-worthy borrowers was doing just fine — it seemed every other day some community bank CEO was on CNBC talking about how many loans his institution was making to small businesses and people who wanted to buy cars or houses. As the story of Chari, his surprise realization, and the academic dialogue that followed make clear, understanding what is happening in the economy — let alone how to fix it — is an incredibly difficult task, even for people who have built their entire careers around doing just that.
Partly because of conversations the economists had with Fed staffers in the banking supervision division, the group came to believe the aggregate data was obscuring the underlying dynamics of the financial system. “If you say New England has a snowstorm with an average snowfall of two inches, that might not reflect the fact that Boston got ten inches and northern Maine got none,” says Ethan Cohen-Cole, another of the economists.
In November, Duygan-Bump, Cohen-Cole and two other colleagues — Jose Fillat and Judit Montoriol-Garriga — put out a paper called “Looking Behind the Aggregates: A Reply to Facts and Myths About the Financial Crisis of 2008.'” In it, they argued that even though overall lending seemed to be robust, that could very well be the result of companies drawing down existing credit lines — agreements banks had made in better times and now couldn’t renegotiate. In fact, there was plenty of anecdotal evidence in the business press to suggest that was exactly what was happening, that companies were locking in funding not to invest, but to hoard cash for worse times ahead. It wouldn’t be hard to imagine regular people doing the same thing…
