are a great many such but which are now viewed with suspicion by lenders 1931 p

Are a great many such but which are now viewed with

This preview shows page 11 - 13 out of 21 pages.

are a great many such), but which are now viewed with suspicion by lenders. [1931, p. 139] As this quote suggests, the idea that the low yields on Treasury or blue-chip corporation liabilities during this time signalled a general state of "easy money" is mistaken; money was easy for a few safe borrowers, but dif- ficult for everyone else. An indicator of the strength of lender preferences for safe, liquid assets (and hence of the difficulty of risky borrowers in ob- taining funds) is the yield differential be- tween Baa corporate bonds and Treasury bonds (Table 1, column 6). Because this vari- able contains no adjustment for the reclassi- fication of firms into higher risk categories, it tends to understate the true difference in yields between representative risky and safe assets. Nevertheless, this indicator showed some impressive shifts, going from 2.5 per- cent during 1929-30 to nearly 8 percent in mid-1932. (The differential never exceeded 3.5 percent in the sharp 1920-22 recession.) The yield differential reflected changing per- ceptions of default risk, of course; but note also the close relationship of the differential and the banking crises (a fact first pointed out by Friedman and Schwartz). Bank crises depressed the prices of lower-quality invest- ments as the fear of runs drove banks into assets that could be used as reserves or for rediscounting. This effect of bank portfolio choices on an asset price could not happen in a Fama-type, complete-markets world. Finally, it is instructive to consider the experience of a country that had a debt crisis without a banking crisis. Canada entered the Great Depression with a large external debt, much of it payable in foreign currencies. The combination of deflation and the devalua- tion of the Canadian dollar led to many defaults. Internally, debt problems in agri- culture and in mortgage markets were as severe as in the United States, while major industries (notably pulp and paper) expe- rienced many bankruptcies (A. E. Safarian, 1959, ch. 7). Although Canadian bankers did not face serious danger of runs, they shifted away from loans to safer assets. This shift toward safety and liquidity, though less pro- nounced than in the U.S. case, drew criticism from all facets of Canadian society. The American Banker of December 6, 1932, re- ported the following complaint from a non- populist Canadian politician: The chief criticism of our present system appears to be that in good times credit is expanded to great extremes... but, when the pinch of hard times is first being felt, credit is suddenly and drastically restricted by the banks... At the present time, loans are only being made when the banks have a very wide This content downloaded from 129.94.8.182 on Wed, 17 May 2017 02:12:24 UTC All use subject to
Image of page 11

Subscribe to view the full document.

VOL. 73 NO. 3 BERNANKE: GREAT DEPRESSION 267 margin of security and every effort is being made to collect outstanding loans.
Image of page 12
Image of page 13
  • Fall '13
  • Updike-Tarrozi

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes