Facts and Myths of the Financial Crisis of 2008
Abstract:
“The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep
recession. Here we examine three claims about the way the financial crisis is affecting the economy
as a whole and argue that all three claims are myths. We also present three under appreciated
facts about how the financial system intermediates funds between households and corporate businesses.Conventional analysis of the financial crisis focus on interest rate spreads. We argue that
such analysis may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences
about variations in the real costs of borrowing. Moreover, we argue that even if current increase
in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does
not necessarily indicate the need for massive government intervention. We call for policymakers to
articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share
with the public the logic and evidence that burnishes the case that the particular intervention they
are advocating will fixx this market failure.”
Comments »1. Three Myths about Quantities
The financial crisis has also been associated with three widely held claims about the
nature of the crisis and the associated spillovers to the rest of the economy. The financial
press and policymakers have made the following three claims about the nature of the crisis.
1. Bank lending to non financial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by non financial corporations has declined sharply, and
rates have risen to unprecedented levels.
Here we examine these claims using data from the Federal Reserve Board and Bloomerg
