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Politics : Welcome to Slider's Dugout
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To: SliderOnTheBlack who wrote (6390)9/14/2007 7:20:55 AM
From: jim_p  Read Replies (1) of 50411
 
Not sure about the LIE, but this is the best article I've read to date on the TRUTH about where we are today in the current credit cycle and how bad it might get:

It's long, but worth the time to read it several times.

ttps://www.paulvaneeden.com/MediaLib/Downloads/Home/Commentary/Frank%20Veneroso%20on%20the%20US%20Credit%20Crunch%20(263%20KB).pdf

To: GPC and FICO
From: Frank Veneroso

September 5, 2007

Executive Summary
1.) The U.S has a credit crunch. Because of the recent turmoil structured finance has come to a halt. It accounted for possibly 40% of aggregate mortgage finance flows and a significant share of other finance flows in the U.S. economy.

2.) But credit crunches can come and go quickly, like in 1966 or 1980.

3.) There has been a loss of confidence in the credit markets. But losses of confidence can come and go quickly - like in 1998. Some of this has already happened. Some ? but certainly not all ? of the short term money market crisis
has abated in response to central bank actions.

4.) I believe the current situation is neither a credit crunch only nor a loss of confidence only. I believe it is an old fashioned credit revulsion.

5.) Credit revulsions are a response to real credit losses resulting from real failures of borrowers to pay. Most of the credit revulsions of the pre war period and the credit revulsion of 1989 ? 1992 took a considerable time to repair. In some cases they set the stage for deep economic contractions and a compounding of the credit crisis.

6.) The most famous example of this was the first banking crisis in 1930 which turned a severe recession into a great depression. The only U.S. postwar example was Credit Crunch Page 2 9/5/2007 the credit revulsion of 1989-1982. It contributed to the 1990 recession and resulted in a very sub par initial economic recovery.

7.) The most famous example of a credit revulsion in the postwar period is the Japanese banking experience from the bursting of the bubble in 1990 to the final onset of recovery in 2003. It was credit revulsion that kept Japan in stagnation
and recession for more than a half decade despite a zero interest rate policy and unprecedented fiscal stimulus.

8.) If one compares the situation of 1989-1992 in all respects to the present situation there is a prospect for aggregate credit losses of almost a half trillion dollars.
Though in great disarray, today?s markets have yet to discount such an outcome.

9.) The ?inflation? in the prices of structured credit instruments above the ?underlying? as a result of the structured finance process adds a second layer of
potential loss which also may not be fully discounted by today?s agitated markets.

10.) If the intensification of financial distress leads to deep house price declines and perhaps a recession aggregate credit losses relative to U.S. GDP may be much higher than in 1989-1992. Such losses could be compounded by the unwinding of
the ?inflation? in structured product prices above the underlying.

11.) Unlike credit crunches, credit revulsions tend to have a long tail. And they do not always respond to a large policy ease. They didn?t in 1930. They didn?t in Japan. They did in 1989-1992, but with a lag.

12.) So far it appears the U.S. financial problem is largely in the (albeit very large) non bank sector. This makes it more like the U.S. in 1989-92 and unlike 1930 in the U.S. or Japan in the late 1990?s.

13.) Let?s hope that 1989-1992 and not something more adverse is the appropriate precedent for today.
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