FACTS AND MYTHS ABOUT THE FINANCIAL CRISIS

INTRODUCTION: 25 Gurdeep Kaur Virdi(A)

The United States is indisputably undergoing a .nancial crisis and is perhaps headed for a deep

recession. Here we examine three claims about the way the .nancial crisis is a¤ecting the economy

as a whole and argue that all three claims are myths. We also present three underappreciated

facts about how the .nancial system intermediates funds between households and corporate busi-

nesses. Here we examine several pieces of evidence on the nature of the .nancial crisis and

the mechanisms by which the .nancial crisis is thought to a¤ect the non.nancial sector of

the economy.

DISCUSSION: 122 Sonia Katoch(B)

Three Myths about Quantities

The .nancial crisis has also been associated with three widely held claims about the

nature of the crisis and the associated spillovers to the rest of the economy. The .nancial

press and policymakers have made the following three claims about the nature of the crisis.

1. Bank lending to non.nancial 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.

Three Underappreciated Facts

We now documents three facts about the way the .nancial system intermediates funds

between households and corporate businesses.

1. In the aggregate non.nancial corporations can pay their capital expenditures en-

tirely fromtheir retained earnings and dividends without borrowing frombanks or households.

2. In the aggregate, increases in non.nancial corporate debt are roughly matched by

increases in their share repurchases.

3. Only about 20% of non.nancial corporate debt is held by banks.

These three facts suggest that the typical .rm can .nance its capital expenditures

entirely from retained earnings. It is di¢ cult to see how disruptions in .nancial markets

will directly a¤ect investment decisions by a typical .

Spreads

Conventional analyses of interest rate data focus heavily on the spreads between in-

terest rates on various types of loans and interest rates on Treasury securities with similar

maturities and pay much less attention to the levels of interest rates on various types of loans.

CONCLUSION: 197 Vineet(C)

Our analysis has raised questions about the claims made for the mechanism whereby

the .nancial crisis is a¤ecting the overall economy.

Our main point is that policymakers have not done the hard work of convincing the

public.or even academic economists.of the precise nature of the market failure they see,

of presenting hard evidence, not speculation, that di¤erentiates their view of the data from

other views, and the logic by which the particular intervention they are advocating will .x

this market failure4. We feel that a trillion dollar intervention warrants a bit more serious

analysis than we have seen.

Policymakers have access to other

sources of data as well. Policymakers could well believe that bold action is necessary based

on data that are di¤erent from that considered here. If so, responsible policymaking requires

that they share both the data and the analysis that underlies the need for bold policy with

the public.