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To: Terry Maloney who wrote (114626)	7/26/2001 6:02:21 PM
From: yard_man	Read Replies (1) \| Respond to of 436258

people or corps have to continue to want to borrow more -- that's where the rub always comes, doesn't it?

To: Terry Maloney who wrote (114626)	7/26/2001 6:06:38 PM
From: pater tenebrarum	Read Replies (1) \| Respond to of 436258

ALLOWED isn't the right word...a contraction won't be a voluntary affair. it will be the result of defaults beginning to exceed new credit creation, or simply the perception that that is about to happen. commercial paper is what LU for instance can't tap anymore...it's basically one of the main sources of short term corporate funding aside from (emergency) credit lines. one of the biggest players in this market is GE Capital...which has recently seen a lot of the debt it has invested in become doubtful...and has in order to avert having to declare too many loans duds become a quasi vulture investor, buying up worthless and money losing assets left and right. it is large and diversified enough to be able to gloss over the problems so far, but its leverage is so extreme (assets are backed by only 4% in capital - as a financial intermediary it is outside the purvey of capital adequacy rules) that it won't take much to get it into trouble. luckily for it, the downturn hasn't spread to all areas it is investing in yet, but my bet is that that is going to happen sooner rather than later. there are numerous signs that corporations are having a tough time getting financing...e.g. the spread between treasury notes and BAA corporate bonds of equal maturities is roughly at the level of the '98 crisis. higher quality spreads have come in though since the Fed began its easing campaign, but i guess that could change quickly if the economy takes a turn for the worse. remarkably, consumer lending in all its forms has continued to explode...that is imo extremely worrisome, as debt service already amounts to a record 14.4% of disposable income, and the overall debt load at 109% of disposable income is also at a record high. savings have disappeared, more or less. to have such extreme levels of indebtedness coincide with an economic downturn is a post WW2 first. it's also one of the reasons why i think this is not going to be a garden variety downturn...