Be It Resolved: There is No Credit Market

Interesting musing from John Carney follows from a post of his refereeing the contretemps between Niall Ferguson and Paul Krugman:

We’ve broken the credit markets. Where once we could learn a lot about investor sentiment and expectations from the credit markets—including the markets for treasuries—the signaling function now is by and large useless. That’s because there are now way too many debt instruments that are the functional equivalent of treasuries. We have a lot of bank debt floating around that is backed by the FDIC explicitly, for example. And even the new debt that banks are issuing without explicit government guarantees is backed by a semi-explicit guarantee voiced by politicians who have promised “no more Lehmans.” In other words, every large, complex systemically important financial institution is a government sponsored entity these days. Why buy treasuries when you get a better return from bank debt that is just as safe? In short, the short term fluctuations in treasury yields now result from way more factors than they once did, and the signals about market expectations they through off are far less transparent.

Thoughts? Agree? It’s a thought-provoking take.

Originally published at Infectious Greed and reproduced here with the author’s permission.

2 Responses to "Be It Resolved: There is No Credit Market"

  1. John Schmidt   June 9, 2009 at 2:20 pm

    The markets now revolve around what inevstors think the US politicians will do next, and ignores critical information in the market place. This will continue until the US treasury is drained of all resources,rendering impotent the US political manipulation of the markets. At that point, the painfull market adjustments will finally be felt.

  2. paul94611   June 10, 2009 at 3:31 pm

    “Why buy treasuries when you get a better return from bank debt that is just as safe?”Indeed.An interesting aspect from where I am sitting is to consider the sum total effects of the trillions in liquidity, guarantees, swaps & RePo’s on all markets. In this concept I am not spooning the Gerber on spreads or the inflation expectation PSYOP. Rather, I am suggesting that there should have been a much greater impact in these and other markets from all of the actions taken to date.I join others who suspect that there may well be more to the story in spreads, equities (lite trade) and commodities in relationship to your poke at the hornet’s nest than is currently discussed in polite company.I suspect that when the wash is out on the line we will once more come to realize what structural engineers already know, that an structure, economic or any other cannot sustain more than the sum total of the carrying capacity of those governed by that system. And just because certain parts are off balance sheet, obscure, less than transparent or lost in a maze of pseudo corporate structure whose essence is the markets in regulatory arbitrage/forbearance makes their impact no less on the whole of the system or its carrying capacity.