[R-G] Dean Baker on the "Credit Squeeze Scare"
critical.montages at gmail.com
Wed Oct 1 17:50:05 MDT 2008
Comment? -- Yoshie
When Wall Street Needs Money, Rules of Journalism No Longer Apply
By Dean Baker
Washington DC's Fox affiliate appears to have been taken over by Wall
Street lobbyists. It has been reporting all sorts of unsubstantiated
assertions that a credit squeeze is destroying the economy. You'd
never know that typical 30-year mortgage is going for around 6.0
percent these days. Back when I last bought a home I had to pay 7.15
percent. But in Fox's sell the bailout campaign, there is no place for
Of course few people expect much journalistic integrity from Fox. On
the other hand, the NYT enjoys a somewhat better reputation. However,
with some of its reporting on the bailout, it's not clear this better
reputation is deserved Today it told readers that "early on Tuesday,
banks were charging one another the highest overnight borrowing costs
ever recorded, as measured by an important rate known as Libor."
That sounds really bad -- the highest overnight borrowing cost in
history. Maybe it would have been helpful to tell readers that this
data has only been compiled since 2001, a period of unusually low
If we want a longer time frame, we can look at the history for the
three month interbank rate. Bloomberg reports that the three month
London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In
the same chart, we can find that it was 5.23 percent a year ago.
Those interested in a little more history can find that the LIBOR rate
was over 8.0 percent for most of 1990 and actually topped 9.0 percent
on some days in September of 1989.
So how scared should we be that yesterday's interest rate was almost
half as large as the three month LIBOR back in 1989? It would be hard
for a serious person to explain how a 4.05 percent LIBOR can shut down
the economy, when the interest rate has been more than twice as high
in the not too distant past. But, that won't fit the NYT credit crisis
story, so you won't see the historical data mentioned.
-- This article was published on September 30, 2008 on Dean Baker's
Beat the Press blog.
The Credit Squeeze Scare
By Dean Baker
The Federal Reserve Board chairman described the credit squeeze as
being "as severe as any supply-induced constraint ever, other than
from policy actions." That statement should help to prompt Congress
into quick passage of the bank bailout bill, except this quote is from
February of 1991, and the chairman at the time was Alan Greenspan.
The economy is in a recession and banks always tighten up on credit in
a recession. When the economy's growth prospects are in question, it
puts the health of any particular business into question. Therefore,
banks will be far more hesitant to make loans during a period of
economic weakness. There were literally hundreds of news stories about
the credit squeeze in the 1990-1991 recession.
While the story of the big Wall Street banks teetering and/or crashing
may be unique to the current downturn, the stories we are hearing of
the main street credit squeeze could be cut and pasted from the news
coverage of the 1990-1991 recession.
There is little reason to believe that the current tightness is
substantially worse than what we have seen in prior recessions.
The most obvious measure of credit tightness is interest rates. We
expect that banks will raise interest rates if the demand for credit
substantially exceeds the supply. Yet, the interest rates on most
categories of loans are far below their averages over recent decades.
According to the Mortgage Bankers Association, the average interest
rate on 30-year fixed rate mortgages was 6.07 percent last week (down
from 6.08 percent the prior week). Back in the early 90s, the average
interest rate on 30-year mortgages was over 9.0 percent.
State and local governments are complaining about having to pay
interest rates of 5.0 percent, but back in the early 90s they were
paying more than 6.0 percent. The same applies to loans for large and
small businesses. The interest rates are somewhat higher now than they
were in prior months, but they are still relatively low by historic
standards. (Real interest rates are even lower by historic standards,
since the inflation rate is higher today than it was in the early
Of course this past history doesn't mitigate the pain being suffered
by families and businesses trying to make ends meet. But it is
important to put the problem in context. No one threatened us with the
Great Depression if we didn't cough up $700 billion for the Wall
Street banks in the 1990-1991 recession.
The bottom line is that we have badly over-leveraged banks who are on
the edge of collapse and we have a credit tightening due to an
economic downturn. These problems are related, but even if we could
snap our fingers and make the banks healthy again tomorrow, we would
still have a serious credit problem due to the recession. In other
words, many of the businesses and people who have been appearing on
news shows because they could not get credit would still not be able
to get credit. (Although they probably will not be appearing on the
news shows once the bailout passes.)
Just to remind everyone the cause is the loss of more than $4 trillion
in housing equity due to the collapse of the housing bubble. The
collapse of this bubble has not only devastated the construction and
real estate market, it also has forced consumers to cut back. Tens of
millions of homeowners no longer have any equity against which to
borrow. Even those who still have equity realize that they will have
to increase their savings to support themselves in retirement.
And all this came about because the experts who are now insisting that
we need a bailout had previously insisted that there was no housing
bubble and that everything was just fine. It is always important to
keep things in context.
-- This article was published on October 1, 2008 by TPM Café (Talking
Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR). He is the author of The Conservative Nanny State: How
the Wealthy Use the Government to Stay Rich and Get Richer. He also
has a blog on the American Prospect, "Beat the Press", where he
discusses the media's coverage of economic issues.
The Center for Economic and Policy Research is an independent,
nonpartisan think tank that was established to promote democratic
debate on the most important economic and social issues that affect
people's lives. CEPR's Advisory Board of Economists includes Nobel
Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman,
Professor of Economics at Harvard University; and Eileen Appelbaum,
Professor and Director of the Center for Women and Work at Rutgers
Center for Economic and Policy Research, 1611 Connecticut Ave, NW,
Suite 400, Washington, DC 20009
Phone: (202) 293-5380, Fax: (202) 588-1356, Home: www.cepr.net
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