The Global Macro Monitor blog was started b an independent trader and economist and, in a prior life, was a global macro hedge fund PM/trader, headed emerging market bond trading desks on Wall Street, and an economist/global strategist, beginning his career at the World Bank in the mid 1980’s. His unique and unconventional views are reflected on his website at marcromon.wordpress.com.

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We constructed these charts with data from today’s release of the Federal Reserve’s Flow of Funds. They are both stunning and frightening as they illustrate the cardiac arrest that took place in the credit markets. The collapse in credit issuance/borrowing began in 2008 and would have been net negative without the Federal government. In 2009, for example, the Federal government was 141 percent of total net credit borrowings.

If, as the President says, ‘the flow of credit is the lifeblood of our economy”, the country would have died in 2009 had not the policymakers taken the extraordinary measures they did. These charts illustrate how close we were to the abyss and should give a clearer perspective on what Bernanke & Co. were/are up against. They are heroes, in our book, for stabilizing the situation and pulling us back from the abyss. The jury is still out, however, on long-term structural adjustment and preventing a global sovereign debt crisis.

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This entry was posted in Black Swan Watch, Budget Deficit, Charts, Fiscal Policy, Sovereign Debt, Sovereign Risk and

Category: Credit

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “The Illustrated History of the U.S. Credit Collapse”

  1. BusSchDean says:

    Striking illustration. Wonder what the next three years look like?

  2. Petey Wheatstraw says:

    The pusher is a hero. The junky is grateful.

  3. Jo says:

    Thanks Paul – nice for you.

    (as in when you rob Peter to pay Paul, Paul will generally be be grateful)

  4. rktbrkr says:

    Awesome graphic of the world’s biggest money laundering scheme as fed prints free money for the TBTF to lend to the US at 3%. I don’t think any of us will live long enough to see the US portion of the flow of funds under the line

  5. Wes Schott says:

    Heroes, Heroes, F*ing Heroes?

    The Fed created the credit bubble, did not see the bubble when it was expanding, and when it burst, they fill the credit void with unprecedented money and credit creation…

    These are no heroes, these are destroyers of wealth…only if you are hugedly indebted, highly levered, are these guys heroes, to the prudent they are criminals!

  6. machinehead says:

    ‘If, as the President says, ‘the flow of credit is the lifeblood of our economy”, the country would have died in 2009 had not the policymakers taken the extraordinary measures they did.’

    A strong statement indeed! Not necessarily false, but apparently based on the insight that a Ponzi scheme must keep growing — backsliding will instantly throw it into a liquidity crisis.

    Even if the federal government saved the Ponzi economy, the larger question is why our way of life should be funded by sequential bubbles in the financial sector, rather than by a formerly productive economy.

  7. Wes,

    you went with: “…The Fed created the credit bubble, did not see the bubble when it was expanding, and when it burst, they fill the credit void with unprecedented money and credit creation…”

    try: “…The Fed created the credit bubble, did not see the bubble when it was expanding, and when it burst, they fill the credit void with unprecedented (excising this: money and) credit creation…”

    There is No Money in Circulation, and, certainly, the FedRes does not Traffic in such..

    see: Definition: Money is a good that acts as a medium of exchange in transactions. Classically it is said that money acts as a unit of account, a store of value, and a medium of exchange. Most authors find that the first two are nonessential properties that follow from the third. In fact, other goods are often better than money at being intertemporal stores of value, since most monies degrade in value over time through inflation or the overthrow of governments.
    http://economics.about.com/od/termsbeginningwithm/g/money.htm

    to begin with..

    and: http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Federal+Reserve+Note+Fraud

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Rothbard+What+has+the+Government+done+to+our+Money

    for further..

  8. Stuart says:

    Life Support comes to mind looking at this chart. Anyone understanding the structural nature of the Federal Debt knows this life support is here to stay. This says nothing of state debt levels either… but then hey, that’s what QE3 will for, right?

  9. Wes Schott says:

    …MEH, agreed…

    …”creating money” is more of a classical euphemism..,

    …as the nervous Helicopter pilot stated on 60 minutes, what bothers him most is that people say he is “printing money”…however, in a practical sense, what the diff?…he sure as hell is printing Au

  10. Wes Schott says:

    …isn’t…

  11. Wes,

    w/: “…”creating money” is more of a classical euphemism…”, no kidding~

    even, the Dictionary (ex. http://www.thefreedictionary.com/money ) glosses over the import of it..

    eu·phe·mism
    n.
    The act or an example of substituting a mild, indirect, or vague term for one considered harsh, blunt, or offensive: “Euphemisms such as ‘slumber room’ . . . abound in the funeral business” (Jessica Mitford).

    http://www.thefreedictionary.com/euphemism

  12. Wes Schott says:

    …”slumber room”, the eventual resting place of all money fiat

  13. ZackAttack says:

    That chart shows me it would’ve been cheaper to go Swedish on them.

  14. AHodge says:

    Nice
    the more detail you need is on the lending sector flipside
    showing that “all other” credit market
    down abt 70% in 2008
    was securitization and shadow banking going away.
    Clear by June 2008,
    THATS WHAT KILLED US.
    Not the Lehman myth of Sept that most officials and Wall st still believe in.
    BTW securitization still absent
    and banking not interested

  15. Stuart says:

    But we can understand why that didn’t happen if Simon Johnson is right and the banks themselves are the Fed’s true and only constituency.

  16. cognos says:

    Great post. Amazing chart.

    Debt = Savings. They balance. We can easily force a “great depression” if we want the price level of everything to go lower (commodities / housing still down 30% from 2008). But why?

  17. rootless says:

    @Mark E Hoffer:

    There is No Money in Circulation, and, certainly, the FedRes does not Traffic in such..

    What is this supposed to mean? That, e.g., US-dollar, which is in circulation (or isn’t it?) is no money? And why should this be true? Because some guru of Austrian nonsense, named Rothbard, and the Mises Institute, claim this too?

    see: Definition: Money is a good that acts as a medium of exchange in transactions….

    Why “see”? From this statement according to which money acts as exchange of transactions doesn’t follow the claim that there was “no money in circulation”. Nor the claim that the US-dollar wasn’t money follows from it.

    @Wes Schott and @Mark E Hoffer:

    …”creating money” is more of a classical euphemism..,

    On the contrary. “Money creation” is more precise than “printing”. Printing is just the technical act of producing physical form of currency in the system. But that’s not what the essence of money creation is. The act of money creation is a pure booking transaction. And currency printed by the Fed, whatever the amount has been recently, is only a fraction of the total amount of money in circulation. The largest part in the system is credit money created out of thin air by the banks. So why would it be more precise to call this “printing”? And why is the word “money creation” an euphemism? I don’t see it.

  18. Mannwich says:

    Right on, Wes & Petey. The “hero” is also one of the causes of this mess. How convenient.

  19. obsvr-1 says:

    yes they put out the FIRE they started, however after the crisis was contained, keeping the same structure in place with the same FIRE starters entrenched is an outrageous crime against free market capitalism and an open competitive banking system.

    It was a financial crisis in 1907 that resulted in the creation of the FED by a cartel of big banks. This 100 year experiment has failed in a colossal meltdown, it is high time to end the FED business as usual of central planning of the economy, tight fiscal/monetary collusion, creating bubbles and boom/bust cycles resulting in massive generational wealth transfers to the elites in the club.

  20. rootless says:

    @cognos:

    Debt = Savings. They balance.

    This is wrong and misleading. It wrongly suggests that the debt in the system is based on savings, on wealth that has been created before and then lent out.

    Debt = Assets. Most of the credit is created out of thin air by the banks. And so are the assets of the banks at the same time of debt creation. Of course, they balance. It’s an accounting identity. And with the debt, which can’t be serviced, going bad the assets go bad too. But this would be even true, if debt was based on real savings. It’s still is a loss for the creditor, if the debtor can’t pay it back.

    We can easily force a “great depression” if we want the price level of everything to go lower (commodities / housing still down 30% from 2008). But why?

    Why is it down so much from 2008? Because real estate property was overpriced relative to income and rent? Because it wasn’t real wealth, it was fictitious wealth created just by increasing the book value of houses, what is never sustainable over the longer-term? You got it upside-down. The price of real estate wasn’t “forced” down by anyone. It has adjusted to reality and the adjustment process is still ongoing.

    Like it is with the stock market, currently. Fictitious wealth based on overpriced assets, detached from the real value of the companies, or the cash flow an investor can expect to get from an investment in the assets over the longer term. It’s a matter of time that the adjustment will happen here too.

    You seem to belong to those people who have succumbed to the delusion that the wealth of a society can be created just by trading things in circles and writing a higher number on the price tag during each transaction. But this won’t prevent any “Great Depression”.

  21. Lugnut says:

    I think this post dovetails quite nicely into the Madoff Ponzi Scheme post that precedes it. Lesson 11, if it were to be added, would be, “Guttenberg Presses are really nice things to have at your disposal, or their electronic equivilent”.

  22. rootless,

    simply, the U$D is http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Fiat+Currency , not Money.

    for further, feel free to read some of http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Fiat+Currency+Legal+Tender+Laws
    or
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=History+of+Fiat+Currency

    personally, I don’t care who says it, but, Fiat Currency, like Bank Credit, is little more than Thin Air..

    maybe, you should see this: rootless Says: December 13th, 2010 at 11:21 am

  23. rootless says:

    @Mark E. Hoffer:

    simply, the U$D is … not Money

    Just repeating what you said before isn’t an answer and bombarding me with a flood of links isn’t either. Why is the US-dollar no money? Because Ron Paul says this or some guy “Rothbard”, or because there are many links that can be found by entering a keyword in a search?

    If the US-dollar is no money, what would be money instead and why?

    Something becomes money when it is generally acknowledged as money in society, as abstract mean of exchange, as abstract representation of exchange value. In principle, anything could serve as this representation of exchange value; gold, silver, salt, US-dollar, or just virtual points or whatever. There is no mythical substance in gold or silver that makes those to “real money” in contrast to US-dollars or virtual points. Actually, fiat money is money on a higher abstraction level than gold or silver as money. Because it has been freed from the illusion that it was some mythical property of the commodity that makes this commodity to money. Money is a purely societal abstract construct. And then there are the ones who believe in the myth about gold and think returning to gold as money will bring the salvation.

    personally, I don’t care who says it, but, Fiat Currency, like Bank Credit, is little more than Thin Air..

    I didn’t say credit money is thin air, I said banks create it out of thin air.

  24. Bill W says:

    There’s no such thing as a free lunch.

    Bernanke was right to act in 2008. The form of his action is what concerns me. A resolution authority could have been made real. We didn’t lack the resources and brainpower, the only thing we lacked was the will.

    Doomsday would not have come in 2008, nor will it come in the future. But every bailout has a cost. I would have preferred to settle up two years ago.

  25. Kris Dannon says:

    I would differ with the opinion of the author on the competence of Bernanke & Co. I tend to side with what Barry Ritholtz wrote recently on the incompetence with which the financial crisis was handled, in first looking at the Obama adminstration (putting aside the competence of Bernanke). Ritholtz has said he felt that Obama essentially missed an opportunity to really deal with crisis in a way that would have made a real difference, with new and innovative ideas and an approach that originated outside of Wall Street rather than from within it. When Obama appointed advisers from the very group of Wall Street cronies that brought the system down and brought the world to the brink of financial collapse, he missed the opportunity to have really created a difference.

    To make Ritholt’z point clearer I would suggest we not forget recent history. It was the former Head of the CFTC, Brooksley Born, who attempted to initially open up regulation of over-the-counter derivatives late in the Clinton administration. It was Born and her staff that were desperately trying to warn the public of the dangers in the unregulated OTC markets. Every effort made by Born and the CFTC staff was opposed by the Wall Street crowd, and chief among those opponents were Greenspan, Summers and Rubin. Some 10 years before the financial crisis began, a mini-meltdown occurred in the unregulated OTC derivatives markets involving the failure of Long Term Capital Management (LTCM). The near collapse of LTCM issued a flashing warning sign to those who had thought that OTC derivatives markets were in no need of regulation. Yet the response was to quietly handle it from the inside by a few large banks who were coaxed by Greenspan into purchasing it. The failure was a warning of what would eventually happen and yet when it was absorbed everyone was assured and felt there was no cause for alarm.

    Bernanke had often been in agreement with Greenspan on policy. And Summers later became one of Obama’s chief financial advisers.

    Born said this recently in a media interview:

    “We had no regulation. No federal or state public official had any idea what was going on in those markets, so enormous leverage was permitted, enormous borrowing. There was also little or no capital being put up as collateral for the transactions. All the players in the marketplace were participants and counterparties to one another’s contracts. This market had gotten to be over $680 trillion in notional value as of June 2008 when it topped… And that is an enormous market. That’s more than 10 times the gross national product of all the countries in the world. I think the profits made by the over-the-counter derivatives dealers, by our largest banks and investment banks, were the upside…. at the expense of all the people who have lost their jobs, who have lost their retirement savings, who have lost their homes.”

    I have strong feelings on Bernanke’s basic incompetency, and I believe he should never have been reappointed as Fed Chair for numerous reasons… just one among many is his responses to questioning put to him by congress relating to the over-the-counter derivatives markets.

    In November of 2005, Mr. Bernanke was questioned by then-Senate Banking Committee Chairman Paul Sarbanes.

    Sarbanes: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast-growing market remain real. How do you respond to these concerns?

    Bernanke: I am more sanguine (confident) about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.

    On February 27, 2008, Fed Chairman Bernanke said, “If you have two investment banks doing an over-the-counter derivatives transaction, presumably they both are well-informed and they can inform that transaction without necessarily any government intervention.”

    As late as February 28, 2008, Fed Chairman Bernanke said, “Among the largest banks, the capital ratios remain good, and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.”

    In a July 2005 interview with Bernanke on the housing bubble:

    Interviewer: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying, “Oh, this is a bubble, and it’s going to burst. And this is going to be a real issue for the economy.” Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

    Bernanke: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

    On March 28, 2007, Fed Chairman Bernanke said, “The impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.”

    On May 17, 2007, Fed Chairman Bernanke said, “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

    On February 27, 2008, Fed Chairman Bernanke said, “By later this year, housing will stop being such a big drag directly on GDP…. I am satisfied with the general approach that we’re currently taking.”

    A few of Bernanke’s comments on the Financial Crisis:

    On February 15, 2007, Fed Chairman Bernanke said, “The Federal Reserve takes financial crisis management extremely seriously, and we have made a number of efforts to improve our monitoring of the financial markets to study and assess vulnerabilities, and to strengthen our own crisis management procedures and our business continuity plans.”

    On July 16, 2008, Fed Chairman Bernanke said that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Since then, Fannie Mae and Freddie Mac have received massive bailouts and have been taken over by the federal government with an open checkbook from the US Treasury.

  26. FrancoisT says:

    The kind of Hero akin to the physician who, by sheer negligence and incompetence, let his patient deteriorate until a trip to the ICU is inevitable, and resuscitation a long shot, but succeeds anyway.

    In my book, this kind of hero get his derrière sued into oblivion for dereliction of duty!!

    But hey! I’m talking from planet Reality here. It must be different on planet FIRE from their capital known as Bonus City.

  27. Kralizec says:

    Regarding “the flow of credit” as the “lifeblood” of the Americans’ economy, and regarding the running argument as to what is or is not money: I approach thinking that any medium of exchange is essentially a composite of credit and debit, creed and doubt. From the heights, it seems to matter little whether the medium is metals to which men sometimes give more or less credence, paper documents to which men sometimes give more or less credence, electronic records to which men sometimes give more or less credence, or promises to which men sometimes give more or less credence. All of these are articles of faith, and we see in exchanges of the very media of exchange, as in other human affairs, that men more or less frequently exchange one article of faith for another, and that some articles of faith are more durable than others.