Wednesday, Feb 11, 2009
Do you agree with the Peak Credit idea?
Bloomberg: Property Investment to Fall Further as Buyers Search for Credit
"Banks have been reluctant to lend or refinance real estate loans as they try to conserve cash after losses and writedowns totaling $1.1 trillion." ... *** Are they really reluctant to extend loans? Who wants a loan? Rolling over loans is not -extending- credit. The Peak Credit idea is very convincing to me, why would this be wrong?
Posted by stillthinking @ 05:09 PM (487 views) Add Comment
5 Comments
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1. bellwether said...
Credit was the engine of growth and has collapsed under the weight of itself.
Money created by the shrinkage of credit is at 10 x the rate at which even a determined govt can expand the monetary base. This shrinkage of money supply is entirely appropriate and govt intervenation is feeble in comparison.
The actions of the Fed will fail (and will fail to cause inflation) because they are based on a premise that an expanded base money supply will lead to an increase in credit. But the market drives credit and the market has woken up to reality that this must be based on real sustainable activity. It's time to pay the debt back and we will contract until that happens.
2. 51ck-6-51x said...
Sure I do. There was no housing bubble only a credit bubble - look at the hedge fund industry, private equity companies, vulture funds, credit cards, personal loans - it's all the same thing credit and leverage.
My take on what happened
As more economies opened themselves up to the world of international capitalism over the last 30 or 40 years, the balance shifted to savers and was exasperated by the need for currency protection (helped along by Nixon's removal of the Gold standard & the freeing of FX markets), this inherently caused credit to become cheaper and cheaper. The natural tendency was for the borrowers to rejoice in this party; for the politicians currently in power to turn a blind eye and take the praise; for the bankers to reap profits from the inevitable transactions - all human nature, no need for any conspiracy.
Even to the aware the natural tendency was to do 'just one more deal' and only the enlightened escape this failing in time (or even profit from it like Jim Simons).
3. Fly By Night said...
Of course it makes sense. There is only a finite amount of debt that any lender will regard as acceptable. So overall the amount of credit which is sustainable is limited. Hence, there is a peak or maximum amount of credit possible. That maximum may not be well defined. It doesn't matter. It doesn't have to be well defined for it to have its effects.
4. bellwether said...
51ck-6-51x - property was critical though as it gave an excuse to extend the credit in sufficinet volume - securitisation is an essential component for banks in advancing large sums of money and these sums increased as the 2 elements values and credit interplayed and inflated.
Once you have potentially 20,000,000 homes in on the act and house prices are tripling the potential (and in this case actual) volume of money because gargatuan.
We may have been here before but I see CDS and derivatives as secondary to this, they were not a prime mover of credit but they did completely obscure what was happening to the point that credit was being extended to, in the hackneyed phrase, anyone with a pulse.
As credit was such a singular factor in the last decades economic growth it is difficult to envisage anything other than a GDP heart attack of the sort that the UK had never before experienced.
5. drewster said...
stillthinking,
Yes I agree with the Peak Credit idea. Mish talks about it a lot in his blog. The basic logic is irrefutable, we've seen a period of massive credit growth and we are now in a period of credit decline. Since credit causes asset price inflation, we are now at the start of a period of asset price deflation.
I agree with bellwether@1, the impact of credit growth on the economy is far greater than the impact of base money growth. Complicated story - read naked capitalism for more background info.