> [Chari, Chistiano and Kehoe (2008), cited in
> the quoted passage, is the Minneapolis Fed paper]
I don't have access to NBER papers from my home computer, but after reading the CCK paper, I'm mystified by their argument that spreads shouldn't be taken as evidence of credit tightening during a crisis *because of* the flight to quality. Hence, you should look at levels.
I'd think the exact opposite is true. Levels are going to be dragged down by the monetary policy reactions to the crisis: laxer fed funds rate and discount rate. The issue is how the risk, term, liquidity, information structures of interest rates react to monetary policy. And, at that, the spreads tell the story. The flight to quality *is* the credit crunch!
Simply said, a credit crunch doesn't mean that money wealth won't find any parking spot at all. What difference in riskiness does it make to keep your wealth as cash or Treasuries? Compare that to keep your wealth as Treasuries *or* as a loan to yours truly. A credit crunch simply means that all regular parking spots are suddenly deemed unbearably risky and their hurdle rates vis-a-vis the seemingly riskless one increase accordingly.
What the CCK paper tells me is that cognitive dissonance, as bad as it may be on our side, is at least as rampant among economists that have staked their academic and professional reputations on free marketeering. As the ineffable Tom Friedman would put it -- the earth is flat!