Four Myths About the Subprime Crisis

A new paper from V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe of the Minneapolis Federal Reserve. Using Fed data and some charts, the trio debunk four myths:

Myth 1: Bank lending to nonfinancial corporations and individuals has declined sharply.

Myth 2: Interbank lending is essentially nonexistent.

Myth 3: Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.

Myth 4: Banks play a large role in channeling funds from savers to borrowers, no charts for this one. The researchers write:

We now turn to data from the Federal Reserve Board’s Flow of Funds Accounts. These data allow us to analyze the claim that bank lending to non-fi...nancial corporate businesses constitutes the bulk of borrowing of these businesses. Banks lend directly to such businesses and indirectly by holding publicly traded bonds to these businesses. In the second quarter of 2008, an upper bound for such bank lending is approximately $1 trillion. Non-...financial corporate businesses obtain funds from banks and by issuing publicly traded bonds that are held by non-bank fi...nancial institutions such as life insurance companies as well as directly by households. The total amount of such funds is approximately $4.5 trillion. Thus, roughly 80 percent of such business borrowing is done outside of the banking system. The claim that disruptions to the banking system necessarily destroy the ability of non...financial businesses to borrow from households is highly questionable.