The depth and breadth of the credit crunch from a recovery viewpoint
This will not be an overnight recovery. Here’s why:
-Consumers are in way over their heads in debt. This consists of credit cards, student loans, car loans, home loans, and home equity loans. The ratios are insane, and before this got really serious, the average home equity was at record lows, credit card debt levels were at record highs and saving was at a record low. Home price levels are so low that most families can’t afford to move, or will take a loss on it if they do.
-Why save (if you aren’t getting paid any significant interest to do so). It actually makes more sense to buy when there aren’t incentives to save. Look at the prudent investors right now, they’re getting creamed in the market. Standard 401k investors are watching years of progress disappear in months. The Dow has dropped 30% to date and if a 401k had any piece of that, its bad news. This goes to show that you’re ‘financial advisor’ who exclusively uses the ‘over a 30 year average the market always does better’ spiel that is showing to be seriously untrue. There is not enough data to suggest that, we are still extremely young from a long term metric standpoint to be saying anything about 30 year averages. In addition there is no way to know what economic regulation or other miscellaneous risks, like a 911 attack might have on the economy, or worse. This all goes back to the concept of risk and reward and the Rounder’s concept: ‘You can never lose what you don’t put in the pot, but you can’t win much either’.
-Like I had mentioned before about the other factors here, the sub-prime crisis will look like a joke when unsecured debt starts to go sour on a macro level. In the case of unsecured debt, there are no assets to foreclose on, nothing to repossess, nothing to leverage. 100% of the loss is a loss, immediately, until later when any settlements are made, if any.
-There is no way to know how the new banking regime will run. It will be mostly government run based on Paulson’s statement last night.
-This is a global issue, and we’re just the first to feel the effects of this. Through derivative financial instruments our liabilities have been spread across global markets. In my previous post I linked to a NYT article that mentions that bond buyers were wiling to pay a ZERO yield, which is unfathomable, because investors are so scared to invest in the markets and the US bond is the only sure thing to them.
-The lack of credit is still a huge issue, and the credit swap spreads are the highest that they have ever been and even at those rates there is still a lack of capital. Credit card companies are cutting limits short of credit card holders and telling them ‘tough luck’.
-This will take time and even with the massive assistance of the government, there are still fundamental issues at play, like the ongoing trade deficit and fiat only currency (non-gold backed).
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