Friday, August 10, 2007
Credit Crunch
By credit crunch I don't mean some new breakfast cereal or chocolate bar, I mean the sudden unwillingness of people to buy junky mortgage debt thus causing a 'liquidity problem.'
It sure looks like I have missed an interesting week in the markets. My vacation will be nice for a couple more days though so I'll provide more next week. Thanks for that interesting post on construction quality M-, very insightful.
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3 comments:
The big clue what is going on in the credit markets now appears on the surface of money markets. All is needed is to connect the dots between secondary mortgage market collapse and rate spikes in money markets which signal cash demands are overwhelming the system.
The scary part is that the cash in money market funds could be under high risk due to principal loss and cash flow problems in securitized debt instruments, if the fund is investing in them.
This could affect or is affecting many money market funds at the same time causing the run on the banks from people who thought they kept their savings in safe place.
The unprecedented liquidity injection could buy some time, but for how long is the question.
The root cause of the current credit crunch is the excess liquidity over the last 6 years which resulted in all kinds of crazy lending.
Trying to cure the problem with more liquidity is like trying to cure a hangover with another drink. Eventually you just have to kick the habit - or the habit will kick you.
All the reports on this have been a bit confusing. The central banks were just doing their job by lending out money when others aren't willing or able.
The reporter was good at making the distinction between bailing out bad loans and adding temporary liquidity, the former being something that did NOT happen Thursday and Friday. His guest eventually admitted as much too after initially inferring banks were bailing out bad loans.
When the Euro CB talked about not bailing out bad loans in February, that is something very different from opening the discount window.
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