V. V. Chari, Patrick Kehoe, and with Lawrence Christiano1 have a working paper arguing that three popular statements regarding the financial crisis are largely a myth.
- Bank lending to nonfinancial corporations and individuals has declined sharply.
- Interbank lending is essentially nonexistent.
- Commerical paper issuances by nonfinancial corporations has declined sharply, and rates have risen to unprecendented levels.
They point to data showing that none of these statements are true. They also point to three unappreciated facts,
- In the aggregate nonfnancial corporations can pay their capital expenditures entirely from their retained earnings and dividends without borrowing from banks or households.
- In the aggregate, increases in nonfnancial corporate debt are roughly matched by increases in their share repurchases.
- Only about 20% of nonfnancial corporate debt is held by banks.
Chari, Chirstiano and Kehoe argue that these three facts suggest that the crisis in the financial markets isn’t quite the problem many are making it out to be for non-financial firms. They argue that firms can finance investment via retained earnings and that if firms can lend directly to each other or pursue joint ventures. Thus the claims that disruptions in the banking/finance system pose a problem for non-financial firms is likely over-stated.
Finally they look at the spreads between various interest rates and Treasury Securities. They argue that during times of a financial crisis looking at these spreads can lead one to conclude, erroneously, that the cost of borrowing has gone up. They argue that during times of crisis there is often a flight to quality–i.e. investors move to Treasury securities which leads to a reduction in the real return on Securities and thus an increase in the spreads.
In conclusion the authors do not claim that there is no recession or that it isn’t possibly going to be a deep recession. They merely point out that many of the claims have yet to be seen in the aggregate data. They also argue that without these claims being true the case for massive government intervention has not been made.
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1Research economists with the Minneapolis Federal Reserve Bank and professors at the University of Minnesota (Chari and Kehoe) and Northwestern.
