The 'Credit Crisis' is Really a Risk Crisis

The Wall Street Journal's Collin Levy summarizes Sam Zell's take ($) on the credit crunch [Emph. added]:

What has changed now is not the existence of liquidity--there's plenty--but the will to use it. The problem isn't a sudden lack of money, but a lack of confidence from the people who control it. Resurrecting that confidence will be the key, and it's unlikely to happen in the near-term. That said, while credit panics may not be anyone's idea of fun, their benefit is that they begin to restore some sanity and caution, keeping the animal spirits in balance.

"We haven't even begun to see the fraud that went on here," he continues, pausing to put on his best Professor Risk face. Imagine you're a broker on a starter home in California and it's a $500,000 loan to a guy who makes maybe $45,000 a year, he says, and someone just changes the numbers and the loan goes through. "Two days later, some investor in Poland owns it. You're out. You got your money . . . What disciplines you?" . . .

But don't jump out the window just yet. Mr. Zell sees some homeowners taking double-digit losses because they're forced to sell, but many won't sell if they don't get their price. And as long as employment holds up, he says, the housing market may be soft for many months to come, but there won't be a national fire sale. He also notes the oversupply is worse in some markets than others. Miami was hit badly, while cities like Seattle and New York have carried on with hardly a dip.

Zell's comments echo Dick Kovacevich's recent observation that the so-called credit crunch isn't really about a lack of available credit, and would be more aptly described as a "risk crisis." The FT notes, meanwhile, that against widespread expectation, the crunch has been contained almost exclusively in the market for structured products. The corporate market, for example, is booming: new issuance there hit a record $53 billion in August, the same month the asset-backed market more or less froze up completely.

Comments

[bondinvestor]

Yes, but as Stichnoth no doubt knows, investment is all about the marginal change. Are corporate spreads wider or tighter than they were in early 2007? Answer: wider. So credit is more costly. Is it "costly enough"? There certainly seem to be plenty of investment banks getting stuck with junk bonds and bank loans on their balance sheets.

Saying it's a "risk crisis" instead of a "credit crisis" is just semantics. "Credit" is just another form of risk, like interest rate risk, reinvestment risk, inflation risk, etc.