Hold Tight! We're Heading For A New Credit Crash...

[eric pebble]

Hold tight! We're heading for a new credit crash.

In global financial markets, the signals have changed from green to red. But rather than a simple traffic jam, a full-scale credit crash may be ahead. As the G7's central bankers and finance ministers meet in Marseille today, here is some food for thought.

Read all here: - http://www.thisislondon.co.uk/markets/article-23985220-hold-tight-were-heading-for-a-new-credit-crash.do

The cliff edge is crumbling thanks to the sheer number of fingernails digging into the frayed soil.....

[Mr. Piddle]

Hold tight! We're heading for a new credit crash.

In global financial markets, the signals have changed from green to red. But rather than a simple traffic jam, a full-scale credit crash may be ahead. As the G7's central bankers and finance ministers meet in Marseille today, here is some food for thought.

Read all here: - http://www.thisislondon.co.uk/markets/article-23985220-hold-tight-were-heading-for-a-new-credit-crash.do

The cliff edge is crumbling thanks to the sheer number of fingernails digging into the frayed soil.....

What! But I need to get a LIAR LOAN to buy a house!

[OLDFTB]

Not again. I still haven't recovered from the last credit crunch yet!

[Redcellar]

What! But I need to get a LIAR LOAN to buy a house!

That's the really frightening bit. This is all happening without our banks putting mortgagees under pressure as happened in the USA, Spain, Ireland ...

So when that bubble bursts how do you think GB will fair? Not at all well say I. We're in deep doo doo based on just the international credit crunch, let alone a UK 'personal credit bubble' that hasn't burst nor been addressed.

The post on Nationwide not allowing people to transfer to interest only mortgages was very interesting. About time and a bit late IMHO.

[Mr. Piddle]

let alone a UK 'personal credit bubble' that hasn't burst nor been addressed.

The post on Nationwide not allowing people to transfer to interest only mortgages was very interesting. About time and a bit late IMHO.

That's exactly it, all this 'lied to get credit' totally hasnt been addressed yet, but when it does..........

I didn't see the post bout the Nationwide, what about those who have always been on IO, have they been transferred to repayment? Cause most of them only took IO cause that's all they could 'afford' (prob maxed out too) they would be bust with repayment.

[scrappycocco]

Can they stretch their bonuses out till Jan so we can have a nice christmas.

[The Masked Tulip]

The post on Nationwide not allowing people to transfer to interest only mortgages was very interesting. About time and a bit late IMHO.

Interesting - did not see that.

[interestrateripoff]

To be fair it's not a new Credit crash, it's the last one resurfacing which they just kicked down the road for a few years, it's moved from a banking crisis to a sovereign crisis. The past couple of years have just been half time.

[Guest spp]

Hold tight! We're heading for a new the same credit crash DEBT crisis.

That heading makes it sound like the system is based on borrowing...ohh

Edited September 10, 2011 by spp

[Venger]

On credit becoming tighter again, there was this in the FT three days ago, by Pimco's Bill Gross.

I didn't understand all of it, other than conditions exist to make banks adverse to lending and not much can prevent deleveraging.

'Helicopter Ben' risks destroying credit creation

FT link via Google.

[benzlife]

The only interesting thing about watching a second credit crunch would be seeing how they managed to kick the can down the road once more. What we have to hope is that this time the public somewhere will say no more and start lynching bankers. I think it's most likely to happen in USA, Spain or perhaps Germany; you can be sure the British bankers will be the last left standing.

[Panda]

On credit becoming tighter again, there was this in the FT three days ago, by Pimco's Bill Gross.

I didn't understand all of it, other than conditions exist to make banks adverse to lending and not much can prevent deleveraging.

'Helicopter Ben' risks destroying credit creation

FT link via Google.

http://www.ft.com/cms/s/0/04868cd6-d7b2-11e0-a06b-00144feabdc0.html?ftcamp=rss

Helicopter Ben’ risks destroying credit creation

By Bill Gross

“Helicopter Ben” Bernanke is a second-generation pilot. As he himself acknowledged in his now well-known 2002 speech, the term was an original of economist Milton Friedman.

Whether father or child, the concept of showering money over national economies to combat deflation has been an accepted principle of monetarism for decades. A helicopter, however, is not your average aeroplane, and the usual laws of aerodynamics do not necessarily apply in all cases. Similarly monetary policy at the zero interest rate bound introduces a new dynamic that may conflict or even reverse standard logic that lower interest rates across the sovereign yield curve are everywhere and always stimulative to economic growth.

This potential paradox arises not just from observation of the Japanese experience over nearly two decades, but from an analysis of our modern-day financial system and its potential inadequacies. Fractional reserve banking, where only a portion of bank deposits are backed by hard cash, as well as unreserved collateral-based lending on overnight repo have allowed for an expansion of credit beyond the bounds of a central banker’s imagination.

Borrowing short-term at a near risk-free rate and lending at a longer and riskier yield has been the basis of modern-day finance. Renowned economist Hyman Minsky explained that this was one of the inherent flaws of the Keynesian neo-classical synthesis. Borrowers wanted lengthy loans to match the practical lives of their plant and equipment, but lenders were disposed towards shorter maturities because of the resultant financial volatility. Over a secular timeframe, a grand compromise was struck somewhere between seven and eight years in terms of nations’ typical average maturity, but lenders demanded an additional feature – a positive yield curve with a substantially lower policy rate that would allow “rolldown” and incremental yield – especially if levered. Thousands of billions of dollars of credit were extended on this basis, some of it as short as a one-week or one-month maturity extension, but all of it – almost everywhere, nearly all of the time – on the basis of a positive yield curve encompassing potential rolldown and incremental returns.

However, in recent weeks, at least in the United States and perhaps soon elsewhere in the Fed dominated global monetary system, the rules have changed. Pilot Bernanke has changed planes from a fixed wing to a rotor-based helicopter by “conditionally” freezing policy rates for at least the next two years. As such the front end of the curve has for all intents and purposes become inert and worst of all flat as opposed to steeply positive. Two-year yields are the same as overnight fund rates allowing for no incremental gain – a return that leveraged banks and lending institutions have based their income and expense budgets on. A bank can no longer borrow short and lend two years longer at a profit.

Common-sensically, an observer might simply suggest that the bank lend even longer with similar risk as before the conditional freeze, but regulators frown on these maturity extensions and discourage them either explicitly via regulations or implicitly via moral suasion.

The conundrum is not limited to leveraged lending institutions. Even investment firms such as Pimco have client guidelines in many cases that impose maturity caps. Short maturity accounts, for instance, might logically benefit by purchasing three- or four-year maturities at presumably similar historical risk as two-year notes, but prospectuses, and slow to change committee structures forbid the maturity extension. The net result, for both banks and investment firms is to reduce financial system leverage. This should be positive on a long-term basis, but negative in the near-term as credit is in effect destroyed as opposed to created.

By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming operation twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity.

The Fed’s old M3 yardstick of credit growth which includes repo monetisation would likely similarly decline. If so the posit of American economist Hyman Minsky of an unstable financial system based on the leveraging of a positively sloped yield curve – and deleveraging when it was not – would be obvious for all to see. Helicopter Ben should be careful – another Blackhawk Down might be in our near-term future.

Edited September 10, 2011 by Panda

[Redcellar]

Interesting - did not see that.

On our HPC frontpage but here's the link

http://www.mortgagestrategy.co.uk/blogs/do-interest-only-restrictions-create-north-south-divide?/1037563.article

[interestrateripoff]

The only interesting thing about watching a second credit crunch would be seeing how they managed to kick the can down the road once more. What we have to hope is that this time the public somewhere will say no more and start lynching bankers. I think it's most likely to happen in USA, Spain or perhaps Germany; you can be sure the British bankers will be the last left standing.

I have found it amazing the Americans have been so restrained especially considering the views of some of their extremists.

[Sibley's Love Child]

Interesting - did not see that.

Home page blog, it's where it's at.

Edited September 10, 2011 by Sibley's Love Child

[kenzdawg]

Ahem, http://www.thisismoney.co.uk/money/markets/article-1645325/LIBOR-Latest-inter-bank-lending-rate-charts.html . I don't know the historical data, but isn't this near 2008 levels?

[Fishfinger]

The cliff edge is crumbling thanks to the sheer number of fingernails digging into the frayed soil.....

Nice one Eric, very poetic

[The Masked Tulip]

Prepare Now, This Could Easily Be 2008 All Over Again

Read more: http://www.businessinsider.com/prepare-now-there-is-so-much-that-could-push-us-into-another-2008-crisis-2011-9#ixzz1Xd8urhUl

No mention of baked beans though.

[Mr 0.01%]

Good article, TY.

Really starting to get the feeling we're at endgame now. Something's gonna give somewhere.

[The Masked Tulip]

Good article, TY.

Really starting to get the feeling we're at endgame now. Something's gonna give somewhere.

Germany expecting a 50% haircut for its banks and insurance companies, but possibly up to 90% - and that is just for Greece!

[The Masked Tulip]

Should this be merged with the Big Fat Greek thread? Just have one economic crisis thread maybe?

[switters]

I think this crisis is big enough for two threads

[The Masked Tulip]

I think this crisis is big enough for two threads

[eric pebble]

Nice one Eric, very poetic

Mmm........... Nice to be thought of as a "poet"....