CREDIT CONTAGION
CREDIT CONTAGION
Source: Mortimer B. Zuckerman, U.S.News & World Report “IN THE FACE OF THE WORST CREDIT and financial crunch since the Great Depression, many of our politicians, commentators, and even non-financial CEOs seem to be in a state of virtual denial of the risks we face. Mere talk about change and hoe will not cut it. The past has caught up with us, and there won’t be much of a future until we work those problems out.
We are having a bad hangover from easy money. Very easy. Thanks to low interest rates and an expanding money supply, rates and an expanding money supply, people and companies borrowed more than they could reasonable pay back. The average debt-to-income ratio for the middle class in America has climbed to 141 percent, twice what it was in 1983. In the United States as a whole, the ratio of all debt to GDP rose to 342 percent at the end of September 2007, more than double what it was in 1975….Asset prices increased and economic growth accelerated with a
double bubble in credit and housing. Banks were willing to lend more and more to purchasers who bid more and more for a house… As the price of assets began to decline, the result was a contraction of debt as banks lost billions, first on sub prime mortgages that rest4d on declining residential real estate.
Then the contagion spread to other categories of debt: credit cards, car loans, student loans, leveraged-buyout loans, commercial mortgage-backed securities…all of which once looked solid and have now begun to experience capital losses….One symptom of the bubble was
that investors and lenders had come to that investors and lenders had come to depend on cheaper short-term borrowing to finance higher-yield long-term holdings…this borrow-short, invest-long strategy has worked over 90 percent of the time. When it doesn’t, the consequences are proving to be catastrophic of leveraged structuring took place. The greatest area of concern, though, is falling prices in the biggest asset category in the U.S. Economy – homes… If prices decrease by as much as 20 percent in 2008 and 2009,, as Merrill Lynch estimates, tis may mean that over 10 million American Homeowners will have no equity left… We are in uncharted waters with unprecedented risks that could result in a longer and deeper recession than any we have
experienced since WWII. Bold leadership and new thinking are urgently needed.
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