“Record Sales: An increase in corporate bond sales …. Borrowers sold $223 billion of corporate bonds this year, up 61 percent from the same period in 2008 and 43 percent ahead of the record pace set in 2007, Bloomberg data show.”
Back in September / October 2008, the graph clearly shows distress. Bank to bank lending nearly ground to a halt.
While it may have been the freezing up of the credit markets that most people blamed for the deep economic downturn, I would argue otherwise. I believe that the credit market freeze need not have translated into a global recession had it not been for the deep and protracted downturn in consumer confidence (especially in the USA).
I previously argued (see article here) that the American consumer was essentially oblivious to the troubles in the credit markets prior to September 2008. While the “credit crisis” actually started in 2007, it wasn’t until Congress got involved did we see consumers get shell shocked, stop buying, and send shock waves through the global supply chains.
Blame Congress (and the financial media)
Until Congress got involved…. consumers kept spending, companies kept selling, importers kept importing, China kept producing, and commodity exporters kept on exporting. Essentially, the “real” economy kept moving along as if the “TED spread” spike didn’t exist (or was too technical to worry about). As late as the summer of 2008, it seemed as if the world economy had “decoupled” from the US, and would keep growing, producing, exporting, and life was fine.
Many analysts blame the fall of Lehman (and hence the Treasury for allowing them to fail) for the freeze up of the credit markets. Perhaps they are right that this was a trigger point, but I believe that most US consumers were still oblivious to the trouble even after Lehman failed. Well, maybe not completely oblivious, but they generally thought the troubles were just on “Wall Street” and didn’t effect “Main Street”….or….at least that’s how they DID think until Congress sold them otherwise (about how this bailout was for Main street, and not just for Wall Street).
My complaint is the way in which the public was sold on the “crisis” in order to get the money to fix the trouble. Congress either (a) didn’t understand finance, or (b) used the opportunity to grandstand for the folks back home. When they rejected the first TARP bill, the stock market tanked. The shock on Wall Street of how “Washington didn’t get it”…led to a massive sales pitch to sell the crisis to the public (for this, I blame the financial media, especially CNBC). In my opinion, it was this selling of the crisis that was the pivot point upon which the “credit crisis” turned into an economy wide “economic crisis”.
Fast forward to today…and the credit markets are working again.
An average $17.1 billion of corporate bonds traded daily this month, compared with $17.7 billion in January, according to the Financial Industry Regulatory Authority. The business is up from last year’s low of $9.4 billion in August and reached the highest level since February 2007, Finra data show.
Imagine for a minute how much better off we would all be had the credit-fix been done in private, or at least without as much fear mongering. Had Congress not done their best to scare the public, the real economy would probably be still moving along. Imagine if the credit “freeze” had just lasted till now, but the real economy hadn’t been sacrificed by politicians for false “anger” at the bankers.
Taking shots at bankers has become a popular sport in Washington these days, but I lay the blame of scaring the public squarely on Congress’s shoulders (with the help of the financial media).
“But I cant get a loan (at a decent price)”
The reason that rates are so high currently has nothing to do with “freezing” of credit markets…not anymore. The rates are high now…not because of “frozen credit markets”, but instead because corporate defaults are expected to rise in the near future (because of a fall in the REAL economy, not in the credit markets). As consumers quit spending, businesses are expected to fail (which then explains why banks dont want to lend).
Moody’s Investors Service forecast will rise to 16.4 percent by November, the highest since the Great Depression and about three times the current rate
- If China were to stumble… (3)
- Fiscal stimulus too small… (1)
- Arguments for the auto-bailout, and fiscal stimulus (2)
- The “savings glut” that may be to blame… (0)
- Socializing our debts… (0)
Originally published at Globo Trends and reproduced here with the author’s permission.