When Wall Street Needs Money, Rules of Journalism No Longer Apply By Dean Baker
Washington DC's Fox affiliate appears to have been taken over by Wall Street lobbyists. It has been reporting all sorts of unsubstantiated assertions that a credit squeeze is destroying the economy. You'd never know that typical 30-year mortgage is going for around 6.0 percent these days. Back when I last bought a home I had to pay 7.15 percent. But in Fox's sell the bailout campaign, there is no place for arithmetic. Of course few people expect much journalistic integrity from Fox. On the other hand, the NYT enjoys a somewhat better reputation. However, with some of its reporting on the bailout, it's not clear this better reputation is deserved Today it told readers that "early on Tuesday, banks were charging one another the highest overnight borrowing costs ever recorded, as measured by an important rate known as Libor." That sounds really bad -- the highest overnight borrowing cost in history. Maybe it would have been helpful to tell readers that this data has only been compiled since 2001, a period of unusually low interest rates. If we want a longer time frame, we can look at the history for the three month interbank rate. Bloomberg reports that the three month London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In the same chart, we can find that it was 5.23 percent a year ago. Those interested in a little more history can find that the LIBOR rate was over 8.0 percent for most of 1990 and actually topped 9.0 percent on some days in September of 1989. So how scared should we be that yesterday's interest rate was almost half as large as the three month LIBOR back in 1989? It would be hard for a serious person to explain how a 4.05 percent LIBOR can shut down the economy, when the interest rate has been more than twice as high in the not too distant past. But, that won't fit the NYT credit crisis story, so you won't see the historical data mentioned. -- This article was published on September 30, 2008 on Dean Baker's Beat the Press blog. ------------------------------------------------------------- The Credit Squeeze Scare By Dean Baker The Federal Reserve Board chairman described the credit squeeze as being "as severe as any supply-induced constraint ever, other than from policy actions." That statement should help to prompt Congress into quick passage of the bank bailout bill, except this quote is from February of 1991, and the chairman at the time was Alan Greenspan. The economy is in a recession and banks always tighten up on credit in a recession. When the economy's growth prospects are in question, it puts the health of any particular business into question. Therefore, banks will be far more hesitant to make loans during a period of economic weakness. There were literally hundreds of news stories about the credit squeeze in the 1990-1991 recession. While the story of the big Wall Street banks teetering and/or crashing may be unique to the current downturn, the stories we are hearing of the main street credit squeeze could be cut and pasted from the news coverage of the 1990-1991 recession. There is little reason to believe that the current tightness is substantially worse than what we have seen in prior recessions. The most obvious measure of credit tightness is interest rates. We expect that banks will raise interest rates if the demand for credit substantially exceeds the supply. Yet, the interest rates on most categories of loans are far below their averages over recent decades. According to the Mortgage Bankers Association, the average interest rate on 30-year fixed rate mortgages was 6.07 percent last week (down from 6.08 percent the prior week). Back in the early 90s, the average interest rate on 30-year mortgages was over 9.0 percent. State and local governments are complaining about having to pay interest rates of 5.0 percent, but back in the early 90s they were paying more than 6.0 percent. The same applies to loans for large and small businesses. The interest rates are somewhat higher now than they were in prior months, but they are still relatively low by historic standards. (Real interest rates are even lower by historic standards, since the inflation rate is higher today than it was in the early 90s.) [major quibble: interest rates are only half the story. I understand that (non-price) credit rationing is intense nowadays. The rate can stay the same, but banks are more likely to refuse you a loan. -- JD] Of course this past history doesn't mitigate the pain being suffered by families and businesses trying to make ends meet. But it is important to put the problem in context. No one threatened us with the Great Depression if we didn't cough up $700 billion for the Wall Street banks in the 1990-1991 recession. The bottom line is that we have badly over-leveraged banks who are on the edge of collapse and we have a credit tightening due to an economic downturn. These problems are related, but even if we could snap our fingers and make the banks healthy again tomorrow, we would still have a serious credit problem due to the recession. In other words, many of the businesses and people who have been appearing on news shows because they could not get credit would still not be able to get credit. (Although they probably will not be appearing on the news shows once the bailout passes.) Just to remind everyone the cause is the loss of more than $4 trillion in housing equity due to the collapse of the housing bubble. The collapse of this bubble has not only devastated the construction and real estate market, it also has forced consumers to cut back. Tens of millions of homeowners no longer have any equity against which to borrow. Even those who still have equity realize that they will have to increase their savings to support themselves in retirement. And all this came about because the experts who are now insisting that we need a bailout had previously insisted that there was no housing bubble and that everything was just fine. It is always important to keep things in context. -- This article was published on October 1, 2008 by TPM Café (Talking Points Memo). -- Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
