S&P: We’re Still Only In The Beginning Stages Of The Credit Crunch
I’ll admit that I’ve said some alarmist stuff about where I think the economic crisis is going, but I’d argue that the alarm is realistic based on the dynamics of the crisis. Some people object and ask why things aren’t that bad yet (only about as bad as the 74 and 81 recessions) if it’s such a big problem. Well, if you’ve ever in a canyon in an arid place like Colorado or Arizona, and there is a heavy rainstorm then you don’t wait around until you actually see the wall of water roaring down destroying everything in its path. The people that have lived around those parts can tell when to be worried or not based on the environment (how much rain there’s recently been) and the dynamics (how much rain has fallen and how long it took). Back when I lived in Colorado, there was a particularly wet spring and one of the heaviest (and longest) rains I’ve seen there and the locals weren’t worried at all; but a few years later during a very dry summer there was a rainstorm that didn’t even dump much (but did it very quickly) and it caused a massive flash flood a couple hours after the rain stopped that killed a few people that didn’t know better.
The point is that the environment and rate of stress is crucial to outcome to predict dynamics, but most people only pay attention to the size of stresses that have occurred already and simply extrapolate. [Note: none of the mainstream economic schools pay attention to what I just said. At all. That’s why they all missed what was going on.] This is why people are so “surprised” when sudden shifts happen. Right now, the financial system has seen quite a bit of loss, but the first stage is mostly over as subprime has been written off completely and there isn’t too much on the immediate horizon. It’s like there was a heavy rainstorm but the skies are getting slightly less gray. However, the “external” stress has set in motion dynamics that won’t be easily overcome, and indeed we haven’t even seen the main wave of the credit crunch if S&P is to be believed. It’s important to note that the problems they are talking about are different than the first two waves of the crisis. The first crunch in fall 07 was from fear of bad debt, the second in fall 08 was from write downs of previous bad debt (which they’re not through yet) but the future crunch is anticipated to be about the lack of present and future good risks due to immense unemployment, bankruptcies, etc.
The moral of the story is that even if banks had good balance sheets, they still wouldn’t want to lend and credit will contract immensely; that is the main flood that hasn’t fully hit yet and that’s what people should focus on.