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We Must Act Now or the World Will End

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17

October 23, 2008 – Comments (5)

Watch out for those WMDs, eh?

http://www.minneapolisfed.org/research/WP/WP666.pdf

Clearly, the United States and the world economy are undergoing a major financial crisis. Interbank borrowing and lending rates have risen to unprecedented levels relative to U.S. Treasury Bills. Several major financial institutions have failed. These real problems have also been associated with four widely-held myths about the nature of the financial crisis and the associated spillovers to the rest of the economy. The financial press and policymakers have made four claims about the nature of the crisis.

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

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by non.nancial corporations has declined sharply and rates have risen to unprecedented levels.

4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false1.

Good thing we all rushed to act before thinking too much eh? Wouldn't want to let data get in the way of a good story, as Dave Meier likes to say.

5 Comments – Post Your Own

#1) On October 23, 2008 at 9:14 AM, alstry (35.36) wrote:

I know one of the authors of this paper personally.  After a few drinks at a dinner over a year ago, I loudly argued that the FED better act on the pending mortgage defaults or it would become a crisis....the person responded that he didn't think that mortgage defaults were a big deal and laughed at such a proposterous projection...............

Oh well.....the rest is history now.....

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#2) On October 23, 2008 at 9:42 AM, lquadland10 (< 20) wrote:

You know it is bad when the greenies are also putting it all together also and not falling for it.

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#3) On October 23, 2008 at 9:47 AM, devoish (98.60) wrote:

My least favorite misleading statement is "This is a wall street problem that will spread to main street" when in fact this is a main street problem that has spread to wall street.

As more and more of main street incomes did not keep up with the cost of healthcare, fuel, etc, wall street ran out of customers that could afford the products they were selling.

I still say our taxes aren't higher, it is the interest payments that are.

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#4) On October 23, 2008 at 11:41 AM, russiangambit (29.19) wrote:

> As more and more of main street incomes did not keep up with the cost of healthcare, fuel, etc, wall street ran out of customers that could afford the products they were selling.

You are so correct, dev. But you will not hear anybody talking about it. We don't want people to know how bad their situation is. Oh, wait. It looks like they already know. But politicians will pretent until the world ends that everything is fine. I still cannot believe they came up with a 3% GDP in a recession and nobody is talking about it.

We need to redefine the recession, and tie it to income growth, not GDP. Negative personal income growth = recession. Simple. 

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#5) On October 23, 2008 at 1:36 PM, eldemonio (98.90) wrote:

I was told by my mother-in-law that it was a good thing they passed the bailout bill.  When I asked he why, she responded that we needed it.  We I asked why again, she cited one of the catch phrases used to pump the bill. 

Most of the pump phrases, I told her, focus on what might happen, not what is actually happening in the credit market.  She gave me that "I can't believe you married my daughter" look.

Fear mongering is a strong tactic to sway public opinion.  Even with all that, most people were still against it.  Good thing our politicians know what is best for us.

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