Thursday, December 11, 2008

Press bias is egregious

The press is just desperate to paint the story ugly. A Bloomberg story today greets the release of household balance sheet data for the third quarter thusly:
U.S. household wealth fell from July to September by the most on record as property values and stock prices tumbled, Federal Reserve figures showed. Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, to $56.5 trillion, according to the Fed’s quarterly Flow of Funds report today. Real-estate-related assets declined by $646.9 billion, following a $217.1 billion loss. Combined with a loss of 1.9 million jobs so far this year, household balance sheets are in tatters, making it harder for Americans to borrow as banks restrict credit.
The reporter neglected to mention several important facts. For one, the decline in net worth from July to September was almost entirely offset by a significant upward revision to prior data—net worth in September was about the same as net worth was reported to have been in July. Two, despite recent losses, real estate assets were worth more in September than they were worth in 2004. Three, despite recent losses, household net worth in September was still 38% higher than it was in the wake of the 2001 recession, and 8% higher than in 2004. Four, it's not easy to find "tatters" in the above chart. Over the past 11 years, net worth has risen 4.9% per year; financial assets 4.9%; real estate 7.5%; and debt 8.9%. Yes, there's been some deterioration in balance sheets, but it hardly qualifies as a disaster. Five, there is no evidence that banks are restricting credit; total bank credit at the end of November stood at $9.9 trillion, up 9% from a year ago, and down only marginally from an all-time high of $10.1 trillion a month earlier.


Alex said...

I enjoy reading your blog. HT to Real clear markets. I assume there is a difference between how much banks have to lend, and how much they are lending out? Is the chart measuring potential money to lend? Or is it measuring money that has been lended? I don't get it.

Scott Grannis said...

Thanks! The mention I made to total bank credit is the amount of money that the banking system has actually lent out. See some earlier posts "No shortgage of money" for more discussion about how all measures of the amount of money and lending are at or near all-time highs. It is simply a myth that banks are not lending.