Credit Crisis Phase II - The Economic Crunch
News_Letter / Credit Crisis 2008 Sep 09, 2008 - 12:03 PM GMTBy: NewsLetter
September 6th , 2008 Issue #23 Vol. 2
Dear Subscriber,
The credit crisis having manifested itself most evidently during the past 12 months through the continuing tightening in the availability of credit to all sectors of the economy despite government and central bank actions of pumping hundreds of billions of dollars if not more than $1 trillion into the financial system so as to prevent a chain reaction of bank failures as the worlds big banks continue to announce ever larger bad debt provisions each and every quarter.
Credit Crisis Phase II - The Economic Crunch
The credit crisis having manifested itself most evidently during the past 12 months through the continuing tightening in the availability of credit to all sectors of the economy despite government and central bank actions of pumping hundreds of billions of dollars if not more than $1 trillion into the financial system so as to prevent a chain reaction of bank failures as the worlds big banks continue to announce ever larger bad debt provisions each and every quarter. The latest economic data now confirms that the the credit crisis is having a serious impact on the major western economies all of whom are now fast tipping into recession, with the momentum of economic contraction feeding in on itself as the chain reaction of contraction in one sector impacts on to the next sector and so on cycling back around as every sector of the economy follows the financial and housing sectors into recession. The expected tendency would be to expect the first sector to be hit hardest to be the first to recover, therefore an end to the crisis will be first seen within the financial sector, the core problems of which relate initially to the US housing market backed derivatives that magnified exposure to the market by in some cases as much as 30X the amount risked. Whilst the world enjoyed a credit boom this brought huge profitability to the banks, however derivatives being an over the counter market, i.e. without any regulated market place, the mark to market methodology deployed to boost valuations hence profits were akin to plucking figures out of thin air. This started to come to a head 12 months ago when the big banks suddenly both a) stopped trading the assets between themselves due to the dubious valuations and b) were not prepared to risk further lending to other institutions where the risks were now un quantifiable as to whether they would be repaid or not, hence the interbank credit freeze and the delveraging of the estimated $500 trillion (BIS) global derivatives market began The US housing market is far from bottoming, my existing forecast suggests that the US housing market will not bottom until late 2010, for at least another 2 years, therefore the position of the big banks will continue to deteriorate and so will the state of the economies which will lag any bottom in the housing markets, hence this suggests at least the next 2 years will be economically tough and on par with what could be termed as a soft depression, depressions tend to be highly deflationary which is what we have been witnessing as asset prices contract literally across the board from housing to stocks and finally to commodities.
The following articles continue to expand on the impact of the credit crisis on the worlds economies and asset prices as politicians such as Britain's Chancellor of the Exchequer Alistair Darling " Economic times are arguably the worst they've been in 60 years… I think it's going to be more profound and long-lasting than people thought " prepare the populous for a recession. Nadeem Walayat,
By: Money_and_Markets The credit crunch. We all know it's here, and that it's impacting virtually every corner of the financial markets. But a lot of investors don't really understand how a crunch really works ... why it's so insidious ... and why the Feds' efforts to ease the logjam have been largely ineffective.
By: John_Mauldin We are entering the next stage of the credit crisis, and one which is potentially more troubling than what we have seen over the past year, absent some policy reactions by the central banks and governments world wide. The crisis was started by an intense run-up in leverage by financial institutions and investors world wide, investing in increasingly risky assets such as subprime mortgages and then the realization that leverage could hurt.
By: Jim_Willie_CB Something big this way comes. Events will center upon the arch-nemesis of gold, the US Treasury Bond. Market interference is too huge, for bonds, for bank stocks, for the entire financial sector. Banking system structures are too broken. The pillars of the US Economy are all in deep trouble, with profound deficits and insolvency the rule of the day. See the USGovt federal deficit (growing fast), the trade deficit (chronically large), the housing negative equity (worsening gradually), and insolvent banks (worse each quarter, despite the denials).
By: Mike_Shedlock The US Treasury Bull market is still intact after 27 years.
By: Mike_Shedlock Before taking a look at the monthly jobs data, let's take a look at weekly claims. The US Department of Labor is reporting Initial Unemployment Insurance Claims continue to rise.
By: Hans_Wagner If you want to learn to invest, one of the best ways is to follow the trend. Following the trend is a proven way to beat the market and grow your stock portfolio. Basic technical analysis provides the tools to identify and follow the trends of the market as determined by the S&P 500.
By: Mike_Shedlock I am going to make a shocking statement. Here it is: Real interest rates are high. Before stating the basis for such a seemingly wild claim it is important to define some terms. In this case "real" means inflation adjusted.
By: Dr_William_R_Swagell The credit crunch of the past year has not followed the path of recent economically debilitating episodes characterized by a temporary freezing up of liquidity - 1982, 1989, 1997-8 come to mind. This crisis is different - a once or twice in a century event deeply rooted in fears of insolvency of major financial institutions.
By: Money_and_Markets Martin Weiss writes: First, the subprime mess clobbered subprime lenders like Countrywide Financial. Then, the cancer spread to America's largest banks that invested heavily in risky mortgage-backed securities.
By: Prieur_du_Plessis The gyrations of financial markets ahead of the Labor Day weekend tested the patience of bulls and bears alike. As big swings took place in thinly-traded markets, I was reminded of Albert Schweitzer's words: “As we acquire more knowledge, things do not become more comprehensible but more mysterious.” For more indepth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.
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