Over a month ago Hank Paulson and Ben Bernanke said that we should be really scared because credit was going to completely and immediately dry up, making it impossible for thousands of small businesses to get loans and make payrolls. They also claimed that the commercial paper market was in major trouble.
Just recently the Federal Reserve Bank of Minneapolis released a paper entitled Facts and Myths about the Financial Crisis of 2008. In the paper they refute four myths about the current crisis. The four myths they refute are that :
- Bank lending to non financial corporations and individuals has declined sharply.
- Interbank lending is essentially nonexistent.
- Commercial paper issuance by non financial corporations has declined sharply and rates have risen to unprecedented levels.
- Banks play a large role in channeling funds from savers to borrowers
I checked FRED at the Federal Reserve Bank of St. Louis, which is a great resource of economic data. A graph of the commercial and industrial credit market, which includes data as of Oct. 8, 2008, shows that lending has done everything except dry up:
Now, looking at a graph of commercial paper, which includes data up to Oct. 22, 2008, it is clear that the commercial paper market has not eroded significantly either:
Don’t get me wrong, I’m not saying that the U.S. and the World are not in a serious financial crisis. But instead of bringing calm and strength to the market, Hank and Ben brought fear and panic to markets by yelling and screaming incessantly about impending economic doom. And they did this without evincing any evidence other than saying “trust us.”
Capitalism is a profit and loss system. The financial sector is bloated, it needs to be allowed to shrink.
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