The Unbearable Lightness Of TARP Reporting

Originally published in September 2010.

A new academic paper by economists from MIT and the NY Fed proves that credit markets were NOT "frozen" during the crisis.

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Monday was the second anniversary of the failure of Lehman Brothers. And it was two years ago tomorrow that Hank Paulson and Ben Bernanke met with the Congressional leadership in a conference room on Capital Hill, telling them that the entire economic system would cease to function if they didn't pass a bailout bill. One of the things Paulson and Bernanke told the members -- something that was repeated over and over, and continues to be repeated -- was that the credit markets were "frozen." Banks, they said, would not lend to each other. If this were true, it would be very bad indeed.

But it wasn't true. The credit markets were not "frozen." Banks were lending to each other. The credit markets were functioning. And now we have a study, by two economists from the NY Fed and one from MIT, that proves it. In "What Happened to US Interbank Lending In the Financial Crisis?," Gara Afonso, Anna Kovner and Antoinette Schoar show that despite claims of a credit "freeze," it never happened. Some theoretical studies, they note, suggest that fear in the interbank markets could be contagious and would lead to a total freeze, but the authors of this study simply looked at the available data. (Crazy, I know.)

It should be no surprise to regular readers of The Daily Bail, but the NY Fed's own data show that interbank lending during the period from September to November did not "freeze," collapse, melt down or anything else. In fact, every single day throughout this period, hundreds of billions were borrowed and paid back. The decline in daily interbank lending came only when the Fed ballooned its balance sheet and started paying interest on excess reserves.

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