Comments on: On the Fragile State of the Credit Markets http://www.nakedcapitalism.com/2007/10/on-fragile-state-of-credit-markets.html Sun, 22 Nov 2009 19:08:53 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Periodista Miguel http://www.nakedcapitalism.com/2007/10/on-fragile-state-of-credit-markets.html#comment-982 Periodista Miguel Thu, 04 Oct 2007 13:17:00 +0000 http://www.nakedcapitalism.com/2007/10/on-the-fragile-state-of-the-credit-markets/#comment-982 Mr. NC, I know this is off-topic, but apropos an earlier discussion (now archived, I think) I wanted to let you know that Barry Ritholtz has a post today on that inflation ex-inflation question. See:<br/><br/>http://bigpicture.typepad.com/<br/><br/>My apologies for the digression... Mr. NC, I know this is off-topic, but apropos an earlier discussion (now archived, I think) I wanted to let you know that Barry Ritholtz has a post today on that inflation ex-inflation question. See:

http://bigpicture.typepad.com/

My apologies for the digression…

]]> By: Doug http://www.nakedcapitalism.com/2007/10/on-fragile-state-of-credit-markets.html#comment-981 Doug Thu, 04 Oct 2007 11:41:00 +0000 http://www.nakedcapitalism.com/2007/10/on-the-fragile-state-of-the-credit-markets/#comment-981 As Buiter/Sibert piece notes, the most likely explanation for high interbank rates is concern about liquidity, i.e. quality. This, in turn, links to a lack of transparency (i.e actual information).<br/><br/>And, while much is appropriately made of the 'see no evil', opaque nature of structured finance, it would seem one conclusion is pretty obvious: way too much leverage.<br/><br/>There must be deleveraging in the future. It will happen. A major problem, though, is at what price because yet another reasonably obvious pattern is that much of the overleverage ties to Minsky moments.<br/><br/>All that is on the financial side. What about 'the real economy'? We read that corporations continue to benefit from a reasonably healthy global economy. Fair enough -- as far as it goes.<br/><br/>But what about those corporations whose cash flow depends on consumption by American consumers?<br/><br/>Where have those consumers been getting the cash to continue spending? Through borrowing -- heavy borrowing.<br/><br/>Put differently, US households are over leveraged. There will be a deleveraging of US households.<br/><br/>So, just how sound are the cash flows of the American-dependent corporations?<br/><br/>The blithe ignoring of credit risk in both capital markets and 'the real economy' have produced, in effect, a shell game of epic proportions. And the jig is up. As Buiter/Sibert piece notes, the most likely explanation for high interbank rates is concern about liquidity, i.e. quality. This, in turn, links to a lack of transparency (i.e actual information).

And, while much is appropriately made of the ’see no evil’, opaque nature of structured finance, it would seem one conclusion is pretty obvious: way too much leverage.

There must be deleveraging in the future. It will happen. A major problem, though, is at what price because yet another reasonably obvious pattern is that much of the overleverage ties to Minsky moments.

All that is on the financial side. What about ‘the real economy’? We read that corporations continue to benefit from a reasonably healthy global economy. Fair enough — as far as it goes.

But what about those corporations whose cash flow depends on consumption by American consumers?

Where have those consumers been getting the cash to continue spending? Through borrowing — heavy borrowing.

Put differently, US households are over leveraged. There will be a deleveraging of US households.

So, just how sound are the cash flows of the American-dependent corporations?

The blithe ignoring of credit risk in both capital markets and ‘the real economy’ have produced, in effect, a shell game of epic proportions. And the jig is up.

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