Facts and Myths about the Financial Crisis of 2008

Abstract

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 aecting 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.Conventional analyses of the …nancial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, dur- ing …nancial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing. Moreover, we argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that dierenti- ates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will …x this market failure.