16 Nov 2008

Brad DeLong Does His Part to Fan Fears of the Bogus Credit Crunch

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Now that Paulson has almost literally admitted he was lying when he asked for the loot, I can’t believe people are still defending his story. At this point I think it’s more an issue of proving “I was right all along on this!” rather than the search for the truth. (And yes, I have taken sides so presumably I myself am subject to this bias. But the charts below will speak for themselves.)

So Brad DeLong posted the following chart:

Next to the chart, he writes, “Will somebody please tell Chari, Christiano, and Kehoe…that there is too a credit crunch?” (He also puts in a link to their paper denying a crunch, though he uses a naked URL, shocking the sensibilities of all professional bloggers.)

I must confess, at first I was surprised by this chart. I actually thought, “Huh, I guess Tyler Cowen was right in his argument with Tabarrok. Just because the absolute quantity of credit in some of these markets is at all-time highs, doesn’t really prove that the price of credit is low.”

Ah, but then I thought, “Hang on, what if DeLong is posting a chart that is completely misleading?” After all, his chart (which he copied from another site) shows the spread between Aaa and Baa yields, versus the 30-year Treasury. And we all know that Treasury yields have dropped sharply, particularly in the shorter end but also in the longer maturities. So what happens if we look directly at the interest rates corporations have to pay to borrow money, on Aaa and Baa bonds?

Fortunately, that information is easily accessible via FRED; it would have taken DeLong about 200 seconds for him to grasp reality with both hands and generate this graph:

I grant you, there is a pretty sharp spike in the Baa yields. Even so, the absolute level isn’t anything shocking.

And check out the Aaa yields. Neglecting the period 2001-2007–when all parties agree there were much-too-low yields that encouraged overleveraging and caused the current mess–the yield right now on Aaa is lower than it has been since the late 1960s. (Caveat, we should adjust all of this for expected inflation. Even so, the above chart hardly tells the story DeLong wants to spin.)

Remember folks, the “credit crunch” really means, “Credit markets returning to their conditions before the criminally insane state during the housing bubble.” In other words, Paulson, DeLong, Cowen, and all the rest giving us this line, want to (a) figure out who is responsible for the shockingly lax lending standards and artificially low interest rates during the bubble years, and (b) take $700 billion+ of taxpayers’ money to prevent the market from purging itself of these conditions.

Last thing: One might say, “OK Murphy, sure, the absolute yield on Aaa and Baa isn’t any higher now than it has been during past recessions. But still, doesn’t that huge spread reflect something real?”

Well, sure. But you know what? I am not entirely sure that the falling yields on Treasurys is being driven entirely by private sector investors. (After all, do you consider 30-year average inflation, or the creditworthiness of the US government, to be higher or lower now, versus two years ago?) I need to look into it more, but I wonder if all the Fed machinations of late are suppressing the yield on Treasurys.

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