When markets froze during the 2007–10 financial crisis, the effects were dramatic as banks stopped lending and housing prices crashed. Now researchers are returning to take a closer look at what happened with one particular group of markets, short-term credit markets.

Turmoil in these markets had visible effects on consumers, suggests research by Northwestern’s Efraim Benmelech, Ralf Meisenzahl of the Federal Reserve, and Rodney Ramcharan of the University of Southern California, who find that a crisis in short-term credit markets in 2008 and 2009 contributed to a steep drop in car sales.

Short-term credit markets make it possible for consumers to borrow money for large purchases such as appliances and cars, often through nonbank financial institutions such as finance and leasing companies. More than 80 percent of car sales are financed with lease or loan agreements. In 2005, more than half of new cars bought in the United States were purchased with credit that relied heavily on short-term funding such as asset-backed commercial paper.

The financial crisis provided an example of what happens when these markets experience a liquidity crisis. When Lehman Brothers declared bankruptcy in 2008, money flowed out of money-market funds and other buyers of asset-backed commercial paper. That made it hard for captive lenders—leasing companies set up by automakers—to offer financing.

From 2008 to 2009, total car sales fell from 8 million to 6.5 million. The researchers calculate that the diminished financing capacity may have been responsible for 30 percent of the drop.

In counties where precrisis sales were most dependent on captive lending, sales fell most sharply. “We find significant evidence that for borrowers living in counties more traditionally dependent on non-bank financing, the probability of obtaining non-bank credit fell sharply over the 2008–2009 period, becoming zero in late 2009,” the researchers write.

Granted, people who borrow from nonbank lenders such as leasing companies tend to be lower-quality borrowers, who during the Great Recession were being squeezed in other ways too. But by looking at house prices, household leverage, household net worth, and unemployment measures, the researchers determine that the falling car sales did reflect the diminished amount of available credit. Plus they find that captive lenders curtailed lending even to consumers with high credit scores.

The US government worked to unfreeze the short-term funding markets with an $80 billion bailout of US carmakers. The evidence, write the researchers, “tentatively suggests that the Treasury and Federal Reserve programs aimed at arresting illiquidity in credit markets might have helped to contain the real effects of the crisis.”

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