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A Dissenting Voice

Von: Michael Ejercito (mejercit@hotmail.com) [Profil]
Datum: 09.10.2008 19:18
Message-ID: <a6fce118-4cdd-49eb-838e-9e237c04595b@p31g2000prf.googlegroups.com>
Newsgroup: talk.politics.misc alt.politics alt.fan.rush-limbaugh alt.current-events
The Data Don't Justify Financial-Market Panic

by Robert Higgs

As the hysteria has grown in the discussion of financial markets and
related government policies, I have been puzzled by the discrepancy
between the best available data and the descriptions quoted in the
press – statements by financial gurus, traders, and professors, as
well as by government officials. To hear these spokesmen tell the
story, you’d think that the world will soon go to hell in a hand
basket, if it hasn’t gone there already. Yet every time I look for
data to check these claims, I find nothing solid to back them up.

The latest case in point concerns the markets for commercial paper.
The Fed has just announced that it will launch an unprecedented
program to support this credit market. As MarketWatch describes this
initiative, the Fed "will buy unsecured commercial paper in an effort
to restart a market that’s ground to a virtual halt in recent weeks."
This report goes on to explain that the Fed’s purpose is "to get
lending flowing again." It quotes John Ryding of RDQ Economics, who
foresees dire consequences "if the Fed doesn’t unfreeze the credit
markets." Got the picture? Restart a virtually halted market; get
lending flowing again; unfreeze credit markets – all of which suggest
that at present nobody is borrowing and lending in these markets.

Such comments are extremely common in the press. Bloomberg’s
Commercial Paper Primer quotes New York University economist Mark
Gertler’s statement that "large corporations are having difficulty
obtaining funds via the commercial paper market." A commentator at
"The Bonddad Blog" says: "people are unwilling to buy this
paper.  . . . [N]o one is buying any commercial paper" (although,
inconsistently, this same blogger notes that "lenders . . . are asking
for a higher interest rate to pay them for a short-term loan," which
implies that someone is lending).

The Federal Reserve System publishes comprehensive data on commercial
paper issuance, commercial paper outstanding, and interest rates on
commercial paper. I presume that these data give us a clearer picture
of what’s going on in the markets than a covey of hyperventilating
Wall Street commentators.

Consider first the interest rates for commercial paper. For the past
several weeks, 30-day nonfinancial paper has been going for about 2
percent; 60-day and 90-day loans in this market have required a
slightly greater rate of interest. Financial commercial paper has been
going for roughly 3 percent, give or take a few tenths of a point,
with little difference among the 30-day, 60-day, and 90-day rates.

Given that the rate of inflation at present is greater than 3 percent,
and presumably will remain greater than 3 percent for the next three
months, these nominal interest rates on commercial paper imply that
lenders are actually giving away money to corporations that sell
commercial paper – the nominal rates of interest are less than the
expected rate of inflation. Is this situation what one expects to see
during a "credit crunch"? Hardly.

Many commentators claim, however, that virtually no transactions are
occurring in this market. These claims are completely false. For the
week that ended October 1, which is the most recent week currently
reported, total commercial paper outstanding amounted to $1,607
billion. Yes, this amount was down from the $1,702 billion reported
for the previous week, but is a 5.6 percent drop a good reason to
panic? If we go back to March 2008, when nobody was talking excitedly
about the commercial market’s "freezing up," we find that the total
amount outstanding, on average, was $1,822 billion, or only 13 percent
more than last week. In March, the market was working fine; now it’s
"locked up." This sort of hyperbole, with which we are being bombarded
hourly around the clock, is totally without a basis in the facts.

For the year 2006, when the financial markets were, for the most part,
still ripping along very nicely, the total amount of commercial paper
outstanding, on average, was $1,983 billion; for 2007, it was $1,781
billion. For the past seven months, on average of the monthly data, it
was $1,743 billion. Does this 2.1 percent decline from last year’s
average give us a good reason to jump off a tall building?

Either someone is deliberately trying to spook us, or these panic-
mongers have simply lost their grip on reality. Officials at the Fed
and the U.S. Treasury are running around like chickens with their
heads cut off. They are dragging the world’s leading central bankers
and finance ministers around with them. The news media are raving like
lunatics. The big unanswered question is: WHY?

October 9, 2008

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