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notes from jim haughey
credit crunch will worsen before the treasury fix takes holdCredit crunch will worsen before the Treasury fix takes hold
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Treasury purchases of bad mortgage assets will not begin until November and will be relatively small until early 2009. The contraction of credit will continue at least until then. Many of our public officials still do not get it. They are still forcing lenders to forgive mortgage debts which aggravates the credit crunch for everyone. Today’s announcement that Bank of America will spend $8.4 billion to forgive mortgage debt inherited from Countrywide Mortgage is the latest example of upside down thinking by prosecutors and their legislative cheerleaders.
The US and Europe will have to experience a long and painful de-leveraging of the financial system. The weakest borrowers will be tossed aside to preserve the stronger borrowers. There is no one to rescue us but ourselves.
The credit crunch has now fully spread to Europe and much of the developing world due to investment in US real estate as well as their own housing bubbles which are now bursting. China, so far, is the exception but this will not persist through next year. With a worldwide capital shortage, where will the capital come from to replace what was lost when people did not pay their mortgages?
China and the Middle East have big pots of money, much of it invested in industrial countries. But these assets are now depreciating like everyone else’s. Their supply of new money is drying up as oil price fall under $90/bbl. and appears likely to fall further and exports to the industrial world plunge. These Chinese and Middle Eastern funds are invested temporarily in the industrial world until they are needed for massive development plans at home. Both china and Middle Eastern governments will likely make a few investments in US and European assets when a high and quick return appears likely. But they will not return these funds over to us to replace what we lost.
Real estate is overpriced far more in both China and the Middle East than it ever was here. These bubbles are now likely to pop or at least leak and absorb much of what appears now to be surplus capital in the hands of the governments of China and the Middle East.
The de-leveraging process will continue until the borrowers and lenders left standing have safe balance sheets and, more important, trust each other to meet their obligations. Be careful who your partners are. Can your bank make good on your line of credit if you need it? Can your customers pay their bills? Can your suppliers finance building your order until you pay them?
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Member Comments
Thank you for your most powerful statement ever: “There is no one to rescue us but ourselves.”
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