October 22, 2008 4:26PM # Non-Myths about the Financial Crisis By [Jagadeesh Gokhale](https://www.cato.org/people/jagadeesh-gokhale) --- SHARE A [paper](http://www.minneapolisfed.org/research/WP/WP666.pdf) by three Minneapolis Fed economists is making the rounds — disputing any funding crisis for non-financial corporate firms. IMHO, this is a very disingenuous paper. All of these so-called myths are really non-myths. Basically, the paper’s focus on “bank lending” is mistaken. Focusing on total borrowing by non-financial sectors shows the accurate picture. **Myth 1. Bank lending to nonfinancial corporations and individuals has declined sharply.** The financial market crisis is in the *non-bank financial* sector, not in the banking sector. And the authors say (correctly) that the majority (80 percent) non-financial sector borrowing is not from banks. So why focus on bank lending to the non-financial firms to see if there’s a credit crunch? **Myth 2. Interbank lending is essentially nonexistent.** If that’s not true, so what? (See response to Myth 1.) Banks are more tightly regulated by the Fed (compared to non-bank financial companies by the SEC). So banks did not hold the riskiest mortgage backed securities (although they originated and sequestered such assets in off-balance sheet entities and “adverse selected” the best ones for their own portfolio, selling the rest to non-bank financial and other firms). So, again, the banking sector is not where the financial market crisis occurred — it happened in the non-bank financial sector. **Myth 3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.** But Federal Reserve Board data on *total* commercial paper borrowing by non-financial sectors took a huge hit in the 2nd quarter of 2008 [(see Flow of Funds, Table F.2 from release Z.1 September 18, 2008, line 3)](http://www.federalreserve.gov/releases/z1/Current/z1r-3.pdf). Thus, it’s not surprising that *bank* credit to non-financial companies may be increasing: Those companies may be drawing more heavily on their lines of credit with banks because non-bank sources of borrowing are constricted. So, where’s the mystery? **Myth 4. Banks play a large role in channeling funds from savers to borrowers.** Again, non-bank financial (and other) companies supply the overwhelming share of non-financial sector borrowing. And the non-bank financial sector is where the financial market crisis is occurring. So, there IS a funding crisis for non-financial firms. Get with it, Minneapolis Fed! ##### Related Tags [General](https://www.cato.org/general) [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/).