Four Myths Created in the Financial Crisis

A new working paper from the Federal Reserve of Minneapolis says that four myths have been created during the financial crisis and perpetuated by the media and others.

"Here we examine four claims about the way the …financial crisis is affecting the economy as a whole and argue that all four claims are myths. Conventional analyses of the …financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during …financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing."

The four myths:

1) Bank lending to nonfinancial corporations and individuals has declined sharply.

2) Interbank lending is essentially nonexistent.

3) Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.

4) Banks play a large role in channeling funds from savers to borrowers.

The authors present an impressive number of charts and statistics to support the conclusion. I would love to go through these one by one, but unfortunately the market seems to be crashing again. Here is the conclusion from the three authors:

"Our analysis has raised questions about the claims made for the mechanism whereby the financial crisis is affecting the overall economy. We emphasize that we do not dispute that the United States is undergoing a …financial crisis and that the United States economy may be in a recession or may experience one in the near future. Our analysis is based on publicly available data. Policymakers have access to other sources of data as well. Policymakers could well believe that bold action is necessary based on data that are different from that considered here. If so, responsible policymaking requires that they share both the data and the analysis that underlies the need for bold policy with the public."

Comments

[nym:]

Myth: there is significance that this is Working Paper 666.

2008 Oct 24 10:16 AM

[Eric Fox:]

I didn't even notice that.

2008 Oct 24 10:26 AM

[Urbane Gori...:]

Kind of hard to really believe anything that comes from this administration... An old supervisor of mine used to say "Perception is everything!"... Bush's lackeys just call it 'spin'...

jegan

2008 Oct 24 03:53 PM

[alajac:]

Neo-cons lie with every breath they take. It's their defining characteristic. Many Democrats (like the Clintons) are also neo-cons. Caught lying=neo-con.

2008 Oct 25 08:33 AM