That Credit "Crunch"

[alexamenos]

I beginning to think that credit crunch is not so much a dire economic crisis as it is a return to some prudency in lending and borrowing. Yes indeedy, there is a vast slowdown in the in the credit markets - folks loaded down with debt and with no reliable sources of income are finding it quite difficult to finance $500k McMansions with zero down, zero principal loans, etc....hence the beast that has fed the housing bubble for the last few years is dying an ugly death.. Arguably, this is a good thing. But potential borrowers with good credit ratings and lenders with a grain of business sense are still active....this is no great surprise.

Anyway, a couple of recent articles standout....one was from the DMN today on the slow down in car sales in the area which repeatedly cited the "credit crunch" as a cause for the slowdown. But the article went on to explain that in many cases the "crunch" was because financiers were insisting on downpayments, they were not willing to roll negative equity from a trade-in into the new loan, and presumably they were insisting the buyers have income. IOW, the "credit crunch" in that article quite explicitly referred to lenders unwillingness to make bad loans, not an unwillingness nor inability to make good loans.

and then there's this article.....

Credit crunch? What credit crunch?

PARIS (Reuters) - The credit crunch is not nearly as severe as the U.S. authorities appear to believe and public data actually suggest world credit markets are functioning remarkably well, a report released on Thursday says.

As a result, governments are pumping masses of public money into the economy across the world because of the difficulties of a few big, vocal banks and industries such as car manufacturing, which would be in difficulty anyway, according to the report published by Celent, a financial services consultancy.....

The report, much of which is based on U.S. Federal Reserve data, challenges a long list of assumptions one by one, arguing that there is indeed a financial crisis but that, on aggregate, the problems of a few are by no means those of the many when it comes to obtaining credit.

"It is startling that many of (Federal Reserve) Chairman (Ben) Bernanke and (Treasury) Secretary (Henry) Paulson's remarks are not supported or are flatly contradicted by the data provided by the very organizations they lead," said the report.

[Mavdog]

we can certainly agree that the tightening of credit standards is in reality a good change for our banks and other lenders to follow.

that is not however what "the credit crunch' truly is about.

previous to the feds efforts to lubricate the flow of debt, there was a paralysis in the markets. commercial paper was very difficult to sell with the volume decrasing by over 80%, an almost $400 B decline if I recall correctly.

that constriction had no basis in creditworthiness, it had to do with a general paralysis on the flow of money, a lack of understanding of what risk there was.

now, due to the efforts by the fed, there is somewhat of a fluid market of funds, and a better capability to gauge risk and allowing for capable borrowers to obtain money from lenders.

nothing wrong with that.

[alexamenos]

Originally Posted by Mavdog

previous to the feds efforts to lubricate the flow of debt, there was a paralysis in the markets.

That's not the conclusion of the linked article (and report upon which the article was based)....more like:

the U.S. and other governments may be throwing good money after bad for want of a better idea of what is really happening. "Just like a doctor contemplating an obviously sick and suffering patient, a massive surgical intervention based on a misdiagnosis can only worsen the patient's condition."

I think they (federalis) mistook the market's liquidation of bad debt for "paralysis", and now we're gonna be the ones in dire need of lubrication.

[Mavdog]

as the article doesn't provide the data on which the conclusions are based, one can't point to specific numbers to show if the conclusions are valid or not, but

The report argues similarly on consumer credit, which it said was at a record high in September, the latest date for publicly available data.

household borrowing declined by over $117B in 3Q 2008 and household debt declined by $30B in that same quarter, and an increase in consumer credit may indicate an inability by the consumer to retire their debt more than any new extension of credit, and

Local government bond issuance had continued at similar levels to those before the credit crisis

duh, money is fleeing equities, and seeking a safe haven such as munis and other public entity bonds. these yields have been driven down by the demand. how does this support the idea that the system was functioning for business and individual credit? and

while bank lending for real estate reached a record level in October 2008, it says

does the statement say that the amount of real estate debt held by banks "reached a record level" or is it saying that the amount of new loans extended for real estate by banks "reached a record level"? the later is undeniably wrong, and the former doesn't support the idea that there was a functioning environment for real estate lending.

not a great piece to say the least.

[Underdog]

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