Lilguy

Credit Crisis Watch: Gaining Positive Traction?

A number of analysts and commentators have noted the reduction in credit spreads across credit types--from CDSs to LIBOR--in the last couple of months. But I think these closing spreads are misleading, at least as far as economic stimulus is concerned. Business and personal loans continue to shrink despite the lower spreads (& rates), in large part because qualification standards have been raised excessively. I doubt (if one could do it) that the spread/qualification ratio has declined--and indeed it has probably increased.

For the moment, I also tentatively question whether the declining credit spreads actually means the financial sector is "safer" (more solvent, more liquid) than it was a few months ago. Most of the reduced spread is based on US & other government policies aimed at keeping/making banks solvent. It is pretty clear now that their efforts so far have been woefully inadequate (despite the $trillion spent or committed), and prospective programs do not promise to fill the gap. Moreover, financial instiutions remain opaque as ever about their true financial condition. If you doubt me, just as Ken Lewis, CEO BAC, about his purchase of Merrill Lynch....