PrefBlog

Menzie Chinn of Econbrowser highlights an exchange between researchers sponsored by the Minneapolis Fed and some sponsored by the Boston Fed.

The Minneapolis group, Patrick J. Kehoe, V.V. Chari and Lawrence J. Christiano, have published Facts and Myths about the Financial Crisis of 2008; this paper has been rebutted in a paper by the Boston Fed’s Ethan Cohen-Cole, Burcu Duygan-Bump, Jose Fillat, and Judit Montoriol-Garriga in a paper titled Looking Behind the Aggregates: A reply to “Facts and Myths about the Financial Crisis of 2008”.

• Bank lending to nonfinancial corporations and individuals has declined sharply
  • Minneapolis claims that:
    • Bank assets less vault cash have remained constant through the crisis
    • Loans and leases by US commercial banks have been constant
    • Commercial and Industrial Loans have been constant
    • Consumer loans have been constant
  • Boston claims that
    • Securitization has declined
    • There has been a significant increase in drawdowns from previously committed loans.
    • Unused lending commitments at commercial banks, especially for commercial and industrial loans, have contracted since the last quarter of 2007.
    • The price of loans (presumed to be related to LIBOR) has increased; spreads between jumbo and conforming mortgages have increased.
• Interbank lending is essentially nonexistent.
  • Minneapolis claims that:
    • Interbank lending has been constant
  • Boston claims that:
    • Data appears to be from Federal Reserve report H8
    • Anecdotal evidence suggest that interbank lending has become largely comprised of overnight loans secured by Treasuries, but H8 is silent on the subject
    • Cash assets of banks have skyrocketted, due to cash hoarding by big banks.
• Commercial paper issuance by non-financial corporations has declined sharply, and rates have risen to unprecedented levels.
  • Minneapolis claims that:
    • Commercial paper outstanding by financial corporations has declined, but non-financial paper has been constant.
    • Financial and lower-grade non-financial rates have increased, but high-grade non-financial rates have been constant.
  • Boston claims that:
    • New issuance by lower-grade non-financial corporations (the lion’s share of the total market) has plumetted since the Lehman default
    • The proportion of “overnight” (1-4 day maturity) paper has increased dramatically

I’ll give game, set and match to the Boston group (especially since Minneapolis ignored the securitization angle), but it’s an interesting exercise in seeing just how complicated things really are; I recommend the papers to any Assiduous Reader who doesn’t mind learning just how superficial is his understanding of the data!

Dr. Chinn also presents some conclusions from Tong & Wei, 2008:

First, we classify each non-financial stock (other than airlines, defense and insurance firms) along two dimensions: whether its degree of liquidity constraint at the end of 2006 (per the value of the Whited-Wu index) is above or below the median in the sample, and whether its sensitivity to a consumer demand contraction is above or below the median. Second, we form four portfolios on July 31, 2007 and fix their compositions in the subsequent periods: the HH portfolio is a set of equally weighted stocks that are highly liquidity constrained and highly sensitive to consumer demand contraction; the HL portfolio is a set of stocks that are highly liquidity constrained, but relatively not sensitive to a change in consumer confidence; the LH portfolio consist of stocks that are relatively not liquidity constrained but highly sensitive to consumer confidence; and finally, the LL portfolio consists of stocks that are neither liquidity constrained nor sensitive to consumer confidence. Third, we track the cumulative returns of these four portfolios over time and plot the results in Figure 6.

Dr. Chinn remarks that

They conclude that about half of the decline in stock prices is due to the credit crunch, with the other half attributable to the decline in consumer confidence

Well, I haven’t read the whole paper! But I will suggest that in using stock prices as a metric, Tong & Wei are not measuring “harm”; they are measuring “investor confidence”, which is not the same thing (Assiduous Readers will be all too well aware of my contempt for the Efficient Market Hypothesis!). However, I may well be in agreeement with Tong & Wei on this point, who state merely:

If subprime problems disproportionately harm those non-financial firms that are more liquidity constrained and/or more sensitive to a consumer demand contraction, could financial investors earn excess returns by betting against these stocks (relative to other stocks)? This is essentially another way to gauge the quantitative importance of these two factors.

This entry was posted on Friday, December 19th, 2008 at 2:32 pm and is filed under Banking Crisis 2008. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.