Thursday, August 23, 2007

Chronicles of the Credit Crunch #3 - Perspectives on the History and Where it is Going

The following articles give different perspectives on the credit crunch and the ultimate outcome. The "game" of the credit crunch is now in progress, the question is where it will end up.

This article from UK's Independent gives a perspective from outside the US:

The debt market is what makes the financial world go round, providing credit for governments and companies to invest and individuals to buy houses, start up businesses and fund their education. The market has become more complex as investment banks dreamt up new investment products based on these loans, which investors lapped up in search of high returns.

After years of relaxed lending, the market has suddenly seized up, triggered by rising defaults by "sub-prime" US mortgage borrowers. As these defaults mounted, institutions rethought their attitude to risk and suddenly became scared of losing money. Banks became unwilling to lend to each other for fear of not getting their money back. The panic has spread to shares, and there are fears that the panic could spread from financial markets to hit the wider economy. . . . .

A recent article Reuters is interesting. Below is the conclusion, which should act as a good teaser.

If -- and I think it will happen -- the interrelationship between asset securitizers and leveraged investors, be they sophisticated hedge funds or some benighted European bank, is put on a permanently more conservative footing, many asset prices will have to fall.

The damage done to the economy by the bad loans already made and by the credit drought we face until the new model emerges will be very significant.

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