Until Lehman failed, I and most of the world had not realized that Fall 2008 would be the time when commercial paper markets would freeze, some major commercial banks would fail (or be gobbled up moments before failing), or that the once-libertarian economist Bernanke would propose spending circa $1 trillion of taxpayer funds helping the banking sector. One story commonly told after the Lehman failure is that banks would cease lending, and this would take a sharp bite out of national investment, which in turn would bring down the economy. Since then, we have been waiting with anticipation to see what would happen to the economy as a whole.
It is quite possible that we do not have to wait. Suppose that, while most of the world did not anticipate these events, the troubled banks themselves understood this much earlier this year. I cannot guarantee you that the troubled banks knew this, but it seems very likely that they did. After all, they were involved in the daily operations in a way that most of the world was not. So let's pursue this possibility to its logical conclusion.
If the soon-to-be-troubled banks understood in 2008 Q1 and 2008 Q2 that they were flirting with bankruptcy, wouldn't they cease lending in 2008 Q1 and 2008 Q2 in order to improve their short term asset positions? Why give a loan to a mediocre customer in Q2 when you recognize that you likely will be cutting off your best customers in Q3 and Q4?! In other words, we should have already seen much of the lending and investment impact of the bank troubles already in Q1 and Q2. [recall my blog entry from yesterday where I explained how the 1930's economy suffered well before the banks actually went broke]
We already have data for Q1 and Q2. Residential investment was down, of course, following the downward trend that began mid-2006 when housing prices peaked. But non-residential investment was UP (a bit), not down. In 2008 Q3, gross nonresidential investment was 4.64% of the capital stock, as compared to 4.55% a year earlier and 4.58% two years earlier.