Credit Tightening Draws Nearer

If you’ve misplaced your calendar, you could be forgiven for thinking it’s the fall of 2007. Big banks are again paying out record bonuses to speculating traders. I’m again receiving letters from banks begging me to borrow money for 0% in special promotional offers. We’re again offering 0% down mortgage loans to people with poor credit (and like last time, it’s being encouraged by congress). There is again widespread talk of how the US dollar must eventually collapse and endless optimism about commodities.

What’s going on? Are investors/citizens/congress really that shortsighted? Ah, the remarkable power of liquidity. When the fed (and central banks around the world) throw enough money at people, those people are given tremendous incentives to gamble. Now, the gamblers don’t see themselves as gamblers. Rather, they rationalize that this or that asset market is cheap. They find convincing analysis by smart economists to justify stockpiling commodities or buying corporate bonds on margin. Similarly, when congress writes a blank check to a construction company, they’ll always find a highway that needs fixing.

The harder thing to explain is the near complete lack of response by the president and congress to the rising populist anger. For better or worse, responding to public sentiment is usually what politicians do best. So why is the modus operandi of the financial sector almost completely unchanged? After every major banking collapse in history (and there have been many), there was a period of conservatism when banks went back to the basic business of taking deposits and making loans. I think the answer is that Congress has just moved slowly, but the regulation is coming, and it will be very heavy. The financial firms donate a lot of money, but every person still only gets one vote. The main street narrative is clear – the financial sector was at least partly responsible for getting us into this mess and they haven’t taken their fair share of the pain. Over the next year, we’ll see that narrative translated into heavy handed legislation.

Aside from the additional regulation, I think we’re in for a repeat of many of the other changes that followed 2007. Just as the speculative bubble in 2007 was largely caused by excess credit, the recent rallies in “risky assets” have the same source. There’s no limit to how much money the fed can print, but I believe the tide is turning politically and we’ll start seeing credit tighten over the next 6 months. For example, Wednesday the front page of the WSJ featured an article about how economists and government officials worldwide believe bubbles are forming. As I wrote 3 months ago, I expect the catalyst for a broad sell off to be the withdrawal of liquidity by central banks. It looks like the credit tightening is growing nearer.

An interesting social trend that's gaining steam is a push towards isolationism. In the last couple months, both liberal and conservative pundits have started calling for us to pull out of both Iraq and Afghanistan (e.g. Fareed Zakaria, Thomas Friedman, George Will). Another trend just starting is "age warfare." People under 40 are asking, "hasn't my generation's future been mortgaged enough to support the overspending of our parents and grandparents? Why are we taking on yet more debt to mail seniors checks?" We're only beginning to see the economic and social fallout from last year's crisis.

Comments

[Fence Crusher:]

A precient article that covers much more than just the forth coming tightening of credit. The last round of champagne is being served. After this glass of liquidity is finished the party will be over and the vomiting and hangover will begin.

And why should my generation bear a crushing burden of taxes to pay for the forthcoming demographic shift as our society ages? We were not the ones who allowed the government to squander the social security revenues in the general fund.

The sins of the father are visited on the son.
There will be consequences for a life of excess.

Nov 05 09:37 AM

[Joe Average:]

In response to your statement...

Another trend just starting is "age warfare." People under 40 are asking, "hasn't my generation's future been mortgaged enough to support the overspending of our parents and grandparents? Why are we taking on yet more debt to mail seniors checks?"

This is silly because at least SS and medicare are taxes that pay for themselves. The same can't be said of income taxes and the programs that they're supposed to fund.

Nov 05 12:03 PM

[shadowstalker:]

Hey Joe Average.

Can someone help me out here? I read recently that social security was running at a deficit for the last couple of months but can't remember where I read it. Damn that CRS. Yep, I'm
an old dude, still pridefully taking care of myself. Anyway if SS and Medicare/medicaid are still self sustaining, they won't be for long.

Nov 05 01:58 PM

[perceptions...:]

"What’s going on? Are investors/citizens/con... really that shortsighted? "
============
The history Past Boom/Bust cycles would seem to suggest that is correct!

Regrettably, I don't see that current events have yet affected the human tendency toward the 7 deadly sins -
Lust
Gluttony
Greed
Sloth
Wrath
Envy
Pride.

Nov 05 05:29 PM

[enigmaman:]

It benefited Obama to demagogue the banks as the market collapsed, it added to his popularity because he appeared to be fighting for the trodden upon, and was fighting the rich, a la Robin Hood, however he also understood that without the bankers the economy and his future were both doomed to failure, so he showered the banks with cash, and left them to do their jobs of creating paper wealth, as soon as the market turned Obama fell silent and has not uttered a word to condemn their returning to business as usual as well as paying out egregious bonuses, he struck a deal with the money changers and did it with our money.

Nov 05 10:47 PM

[Fence Crusher:]

"...he struck a deal with the money changers and did it with our money. "

Precisely.

Our government has completely failed us. Short of a full blown revolution with it's entailing bloodshed that none of us want to see; we need a third political party to try to turn things around.

I don't agree with all elements of the Libertarian platform but ONLY they are going to get my vote going forward.

I am no longer going to be suckered into the "don't throw your vote away" logic that has in the past caused me to play lesser of evils with the Dems and Reps. Both of which sell me down the river in one way or the other after they're in office.

A strategy of just voting out the incumbent isn't going to work either. We must uproot the two entrenched, special interest soaked, main parties if we have any hope of turning America around without bloodshed.

Nov 06 09:04 AM

[Vega:]

Social Security is drastically undefunded, so it's commonly accepted that either younger people will get their futures benefits cut (effectively their SS payments will fund current retirees and then they'll get little of it back for themselves), or we'll have to shore up the SS fund with general taxes.


On Nov 05 12:03 PM Joe Average wrote:

> In response to your statement...
>
> Another trend just starting is "age warfare." People under 40 are
> asking, "hasn't my generation's future been mortgaged enough to support
> the overspending of our parents and grandparents? Why are we taking
> on yet more debt to mail seniors checks?"
>
> This is silly because at least SS and medicare are taxes that pay
> for themselves. The same can't be said of income taxes and the programs
> that they're supposed to fund.

Nov 06 01:57 PM