The Crisis Response Worked Wonderfully
By Arnold Kling
1. The indicator is the percentage of banks reporting easing or tightening of lending standards. I do not believe that this is the typical indicator. I understand that using actual lending as an indicator has the disadvantage that it can be affected by demand for loans as well as whether conditions are “clogged.” But, actually, that is relevant. If lending is down because of demand, then “unclogging” the financial system was not the answer, was it?
2. Even using this indicator, you have to look at the shape of the chart, not its content, to see that the crisis response worked. I mean, the shape is a nice “U” with a bottom at the point where the interventions began, so isn’t that wonderful? Except that when you look at the Y-axis, you see that it shows that the indicator was below zero for close to 18 months after the intervention, which means that more banks were tightening than loosening standards during that time. The chart is designed to make you focus on the second derivative. If instead it were to focus attention on the first derivative by plotting the cumulative percent of banks that had tightened credit standards since, say, the end of 2006, it would show that the bottom of the crisis was reached in the latter part of 2010, not when the massive interventions took place.
By the way, I am not saying that this is the most deceptive chart in the package (look at the others). But it is the only chart that touches on the central goal of TARP, which was to “unclog” the financial system. If this is the best they can do, then I think the question of whether TARP and the bailouts did any good is still an open one.