Thursday, October 9, 2008

Money is plentiful, buyers are scarce


As we contemplate the financial destruction all around us, it's very important to keep in mind that this has nothing to do with a shortage of money or a cessation of bank lending. To begin with, the Fed has pumped in a massive amount of reserves to the banking system, as illustrated in the first chart, in the most aggressive response ever to a financial crisis. The second chart shows the level of M2, the best measure of the money supply I know. It has been growing steadily, and is up over 6% per year for the past two years. There is nothing strange or mysterious or deadly going on here. As my other posts have shown, bank lending to the nonfinancial sector continues growing in unabated fashion, and total bank loans are at a record high as of just a week ago, according to data released very recently.

This is a problem of confidence, which in turn has created a shortage of buyers. This doesn't need to be an intractable problem, and there is little risk, as I see it, of the economy shutting down because of a lack of money. It's probably very true these days that the only thing we have to fear is fear itself.

8 comments:

CDLIC said...
This comment has been removed by the author.
CDLIC said...

Maybe more confidence could be mustered if we call off the Presidential election and fire Congress...permanently. Anyone have a better idea? :)

Tory Conservative said...

I do think that the crashing market is a vote of no-confidence in the Democrats, since it looks like they will sweep the elections. Investors have decided to put their money on the sidelines until they get a better understanding of the Democrat political agenda.

mark-o-burg said...

Dear Tory Conservative,

It may well be a vote of no-confidence in the Democrats, but the media arm of the Democratic party (ABC, CBS, NBC) are all pushing hard to blame the current crisis on "THE ADMINISTRATION" (as if Congress didn't even exist).

Gene Prescott said...

With the overnight jump in LIBOR I'm wondering about propriety of using it as reference point in LOC agreements going forward. Would prime now be a more predictable/stable reference point?

Scott Grannis said...

Prime usually trades quite a bit higher than Libor. It is usually Fed funds + 300 bps. Once the dust settles on this I think libor will be better behaved.

Scott Grannis said...

It may not be a coincidence at all that the market crash has coincided with the rising probability of an Obama victory. There is no question that his proposals would not be good for the economy, in my opinion.

However, even if the market is scared of an Obama presidency, I don't see how he could be so foolish as to plunge us into the recession/depression that the market seems to be expecting.

Scott Grannis said...

The great tragedy of this crisis may well be that the electorate ends up blaming Republicans, free markets, and capitalism, and demands more government regulation and more government programs as a result.