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That Working Paper Again (And For the Last Time)


Yesterday, as you may recall, I posted a link to a working paper published earlier this month by the Minneapolis Fed.  “The United States,” the paper claims, “is indisputably undergoing a financial crisis.  Here we examine four claims about the way the financial crisis is affecting the economy as a whole and argue that all four claims are myths.”

Today, my mailbag overfloweth.

From a reader who believes the working paper makes a point:

The authors of the Fed paper do not claim that there was no financial crisis. All they show is that the crisis did not have any appreciable effect on lending to the non-financial sector.  The Economist blog [an item to which Andrew Stuttaford provided a link] conflates the two and argues that the Fed paper is wrong because there is a financial crisis….The authors of the Fed paper are raising legitimate questions. The Economist blog is being too dismissive. I think the burden of proof is on the Fed and the Treasury to release any data they relied on and convince us that there was indeed an onset of a lending crisis in September.

From a reader who considers the working paper badly misleading—and one of many emails I’ve received from readers who work in what used unironically to be called high finance:

I am 32-years-old, very conservative (never voted for a Democrat in my life and can’t imagine that I ever will) and work in leveraged finance at a bulge-bracket investment bank in New York.  I have been too busy lately to remain current on the happenings in The Corner; yet, I noticed your post today, citing the Minneapolis Fed, asserting counter to conventional wisdom that bank lending to non-financial institutions has not decreased.  I wish this were true, but I can assure you it most definitely is not.  I am reluctant to send you charts which clearly illustrate the fact that credit has dried up (especially in the non-investment grade world that I live), as this information is largely proprietary and may be frowned upon by my employer.  I hear, though, that many of us may not be employed after tomorrow, because things are just that bad.

From another knowledgeable reader who considers the working paper bunk:

I waited with interest for you to post the results of your liquidity crisis e-mails.  Thank you for posting them.  Unfortunately, unlike 99% of what you write, I have to strongly disagree with your verdict.  To categorically state that reports of a freeze in credit markets are false is, simply, false.  [I didn’t.  I merely paraphrased the findings of the working paper.]

I don’t have time tonight to lay out a full case in favor of a seizure in the credit markets so I’ll toss a few random points together below.  

[T]he Minneapolis Fed working paper (to call it a study is misleading) has several obvious drawbacks.  Andrew Stuttaford’s Corner link points out several of these….

[Next] (and this has what has been keeping me up at nights) Paulson and Bernanke have by far the most transparency into the financial system of anyone on the planet.  By far.  There is a reason they’ve been running around like their hair was on fire (well – what’s left of their hair I guess).  Through all of this they have had access to the money flows, bank balance sheets, data on the reaction of hundreds of markets, etc.  And they still felt this unprecedented intervention was necessary.  I don’t like it, but to be perfectly honest, I think the benefit of the doubt should be given to those individuals that have the most information available to them….

There is no perfect information.  Hank and Ben are responding to real things they are seeing.  Saying that they are lying (and saying that their claims are false is saying that they have been dishonest) is, in my opinion, irresponsible.  [I can what the reader is getting at here, but I never called Paulson or Bernanke dishonest.  Neither did the working paper.]

The disputes here lie far beyond my competence, Lord knows—and when well-meaning, articulate and informed fellow conservatives tell me I ought to think twice before embracing the findings of Fed working paper, I most certainly will. 

But there’s an important point here all the same.  Engaging in the most dramatic, far-reaching intervention in decades, Paulson and Bernanke have created new obligations on American taxpayers that run to hundreds of billions of dollars—and asked us to brace for more.  On what basis?  I am not attempting to deny the crisis.  But I do believe, to quote the first reader, that “the burden of proof is on the Treasury and the Fed…to convince us.”

Why?  Because a tiny handful of men has been making decisions for the entire nation.  In the first days of the crisis, this is was acceptable—and probably unavoidable.  But to sustain their efforts, Paulson and Bernanke will need to carry the nation with them.  They’ll need to “convince us.”  And note that all three of my correspondents—each of whom, obviously, is financially sophisticated–lacked reliable, public information with which to make his case.  No doubt Treasury and the Fed possess a certain amount of data that must remain private.  But the rest of the data?  Surely they should make it public just as promptly as they possibly can.


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