I see the economic theory and I see the political philosophy, but what I don't see are numbers.
Yell Lenin and Fascism (?) all you want, but nowhere does Melloan or O'Driscoll offer a cogent argument based on data reporting Government responsibility for decreased lending in the commercial sector. What did they expect commercial lending to do during the worst recession since the 1930's, sky-rocket?
There's theory on both sides of the crowding argument.
The textbook story about crowding out under normal conditions contends that public easy money is a better risk adjusted deal for bankers than buying commercial paper. This "steals" resources from the private sector.
The pro-stimulus reasoning is that as long as the economy is still reeling from the 2008 meltdown commercial paper is too risky for bankers anyway so we might as well pump them full of easy money to inject liquidity into the market and prod the economy back towards full productivity.
Data seems to point towards #2. T-notes are still well below where they have been the last 5 years, after an ephemeral drop due to flight to quality. http://finance.yahoo.com/echarts?s=%5ETNX#chart4:symbol=^tnx;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
It's hard to believe that T-notes at 3.5% are driving out a whole lot of private paper, but still possible on a risk adjusted basis. If there is that much risk built into models or intuition or whatever voodoo bankers are using these days it's unlikely they'd be buying much commercial paper regardless. I don't get all the scare stories about crowding out and deficit troubles while interest rates are still relatively low.
Of course Gov. is going to sell a lot of paper to fund a stimulus when times are bad, but that doesn’t mean times are bad because the Fed sold paper. Correlation and causation is not the same thing.
Welcome to Non Incautus. This is a blog written by a group of Washington & Lee graduates that focuses on contemporary issues, economics, politics, philosophy, movies, music, television and everything in between. It aims to educate and enlighten (the writers as well as the readers!) while fostering civil discussion and debate.
I see the economic theory and I see the political philosophy, but what I don't see are numbers.
ReplyDeleteYell Lenin and Fascism (?) all you want, but nowhere does Melloan or O'Driscoll offer a cogent argument based on data reporting Government responsibility for decreased lending in the commercial sector. What did they expect commercial lending to do during the worst recession since the 1930's, sky-rocket?
There's theory on both sides of the crowding argument.
The textbook story about crowding out under normal conditions contends that public easy money is a better risk adjusted deal for bankers than buying commercial paper. This "steals" resources from the private sector.
The pro-stimulus reasoning is that as long as the economy is still reeling from the 2008 meltdown commercial paper is too risky for bankers anyway so we might as well pump them full of easy money to inject liquidity into the market and prod the economy back towards full productivity.
Data seems to point towards #2. T-notes are still well below where they have been the last 5 years, after an ephemeral drop due to flight to quality. http://finance.yahoo.com/echarts?s=%5ETNX#chart4:symbol=^tnx;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
It's hard to believe that T-notes at 3.5% are driving out a whole lot of private paper, but still possible on a risk adjusted basis. If there is that much risk built into models or intuition or whatever voodoo bankers are using these days it's unlikely they'd be buying much commercial paper regardless. I don't get all the scare stories about crowding out and deficit troubles while interest rates are still relatively low.
Of course Gov. is going to sell a lot of paper to fund a stimulus when times are bad, but that doesn’t mean times are bad because the Fed sold paper. Correlation and causation is not the same thing.
Happy Thanksgiving!
More on the debate from Hamilton:
ReplyDeletehttp://www.econbrowser.com/archives/2009/11/yes_the_future.html
and a rebuttal from Krugman:
http://krugman.blogs.nytimes.com/2009/11/27/deficits-the-causes-matter/#more-5691