Feeds: 
symbol identifies content for paid subscribers only.
Credit Crunch? Look at the Chart, Skip the Article
The NYT has an article promoting the credit crunch story whereby credit worthy businesses are supposedly unable to get credit. Readers would be well-advised to skip the article and just look at the accompanying chart. The chart tells readers that the interest rate on the debt of investment grade corporate debt was pretty much the same in the fourth quarter as it was earlier in the year, and in fact only a small amount higher than it had been in the three preceding years. In other words, investment grade companies are paying pretty much the same interest rate as they always have and probably expected in their planning.
The chart also shows volumes of debt issuance. There was a falloff in issuance of investment grade debt in the third quarter (after a big surge in the second quarter), but the fourth quarter levels are pretty much in line with prior years.
There has been a serious falloff in the issuance of high yield debt as well as surge in the interest rates payable on this debt. That is what happens in recessions. The survival of companies whose survival was always questionable becomes far more questionable in a severe downturn. These companies are in reality far higher risks, so it is understandable that banks would be reluctant to lend to them even if the banks had plenty of capital.
The credit system is undoubtedly facing considerable stress because so many banks are effectively bankrupt, but the economy is not in a downturn because banks aren't lending. It is in a downturn because we have just lost $6 trillion in housing wealth and $8 trillion in stock wealth. The expected effects of this loss of wealth is the huge falloff in consumption that is driving the downturn. The condition of the banks is very much a secondary issue.
--Dean Baker
COMMENTS (8)
paper losses in that the value of the assets depended upon others one, valuing them at a certain price and two, having the money to pay for that price. We can 'value' anything at any price we want, but if no one, or too few, can pay that 'value', the value is meaningless.
Look at the stats:
median US income-50k
median US home price-250K
monthly budget family of four:
take home pay- 3300
mortgage (based on 200k assuming 20 percent down on 250 k)- 1199
real estate taxes- 200
new car loan- 425
elec- 100
heat- 100
health ins- 200
car ins- 100
food- 800 (less than 10 dollars per meal)
gas- 150
Our median family is now at 3174 dollars without credit cards, without clothing, dental, car repairs, out of pocket medical expenses, home equity loans, etc...
So, where did the ability to consume more things come from? A phony increase in housing and the use of credit cards led the way. There was no wealth there to spend. It was predicated upon people making more money and being able to afford more expensive homes. That did not happen, as you know.
The reality is that the median US household is broke and has been broke for a long time. While wealth zoomed for the top 10 percent, the rest of us flat-lined. A bank, if run properly, would be insane to lend money to the average US household. They would never, most likely, get their money back.
Why don't you use your position of influence and talk about how society cannot survive with wealth in so few hands. The math is just not doable. There is enough for everyone if we do things the right way.
Posted by: caliban | January 19, 2009 12:17 PM
Interestingly, a company profiled in the NYT article, Southwest Airlines, recently sold investment-grade debt @ 10.5%. Back in 2002 (after the terrorist 911 rather than the recent financial 911), 10% debt was graded junk. Apparently, yesterday's seedy hooker is today's classy date. Separately, on the liquidity front, the fall in consumption is driving down the economy, but is raising the savings rate. Doesn't an increase in savings increase bank liquidity which increases investments and accordingly lowers the corporate debt yield?
Posted by: Thomas Molitor | January 19, 2009 12:18 PM
Dean: Paul Krugman appears to disagree with you in his latest blog post, but it is my argument that he is addressing a different point than you are trying to emphasize.
Pr. Krugman thought your main point was about the credit crunch (or not) itself; it appears to me that you are emphasizing the role of value lost in the housing and stock market in the recent economic problems.
http://krugman.blogs.nytimes.com/2009/01/19/spreads/
Posted by: El Cid | January 19, 2009 12:27 PM
1- Nowhere in the article it is said, or supposed, that the credit worthy businesses are unable to get credit.
2- Their chart is only for corporate debts and not for the total loan market.
Posted by: Gerry Flaychy | January 19, 2009 12:57 PM
Dean,
You are misspoken for three reasons:
1) Companies are paying the same yields as when they sold the bonds in 2006 or earlier - ie- when credits was really cheap, less than what you currently show
2) Fourth Quarter Debt Issuance that was not FDIC backed was non-existence, mimicking 3rd Quarter Debt Issuance. In other words, unless you became a bank and the government backed you up, you could not get debt.
3) In a ZIRP environment with deflation, 6% is incredibly expensive.
http://www.spreadsoncredit.com
Posted by: David Levy | January 19, 2009 1:58 PM
"The condition of the banks is very much a secondary issue"
The banks are tertiary. The collapse of market values is secondary. The primary is a decrease in consumption/demand in a highly leveraged scenario over past years. Market values started falling years ago. Banks and other investors got caught in their own leverage traps, leading to severe local dislocations and institutional failures at the margins (WaMu, Lehman, BS, ...).
Where are CDS issues these days? They got a lot of press last fall, now they seem to have gone underground. But BAC got $118B in cash and guarantees supposedly for Merrill Lynch. And $81B of that was for risky derivatives.
Are we talking about absorbing gambling losses here?
Posted by: eds | January 19, 2009 6:52 PM
The Fed's takeover of the commercial paper market and guarantees for LIBOR and other interbank markets belies your position Mr Baker ...
What would the TED Spread, LIBOR and Commercial Paper markets look like without Fed intervention? What would the mortgage market look like?
These measures can also be said to be higher than the given measures as they are in the same liquidity trap as the Fed.
We do indeed have a Credit Crunch, a very severe Credit Crunch. Should you not think so advocate for the Fed to retreat from these market activities.
Posted by: mmckinl | January 19, 2009 6:58 PM
It's called deleveraging. Or delevering. Or it would be, if those were words.
The simple fact is that this country was actually MORE leveraged than the last time we ran up a huge debt bubble, back in the late 20's. When everyone delevers (sells off assets and reduces debt) at the same time, of course prices of assets (stocks, real estate, commodities) fall.
I wish the media would tell the truth here, this delevering has a long way to go. We had a bigger debt bubble than the 20's, and we'll have a bigger depression than the 30's.
Posted by: Harrumph | January 20, 2009 6:42 AM