For 10 months already I am posting articles about credit crunch. Back then pretty much nobody was using the credit crunch words, now they are everywhere. My very first post about credit crunch is titled “The recession call“. I wrote it back in January and gave my expected timeline of events, from January to October with expected recession starting around October. While my timeline was only partially correct it seems to me that it was better than any prediction that you’ve heard on TV back then. Well, it’s never late to praise myself 🙂
Now it’s probably time to ask what’s next, because my prediction is ending this month, the future finally came.
I think the very last step that is left before everything falls apart is called “pull the plug”. What’s that?
At this point many lenders and borrowers are suffering losses and there is a lot of talks that this or that company is a good candidate for bankruptcy. So far lenders are not only extending the credit but are also expanding it. Look at this. The outstanding banking credit is exploding from 8 trillion a year ago to 9 trillion now, with $350 billion of new loans since July. The banking credit is replacing the commercial paper market and bond market. Of course the interest on banking loans is pretty high. I would say there is still a lot of trust in the system when banks are lending more and more even in the face of the evolving problems.
There is a great deal of what is called a “moral hazard”, or a believe that any major bank or corporation will be bailed out by taxpayer’s money. They are too big to fail. Maybe. But Bernspan can’t save anyone, he will have to chose.
I imagine the current situation as a standoff between a group of cowboys with arms ready waiting who will pull the plug first. At some point someone will deny a credit to someone, and someone will default on the credit, sending a big wave through the credit market. We already had so many bail-outs recently that at some point the bail-out limit will be exceeded.
I’m not ready to put a timeline on this yet. It can happen any moment, even this week. Or maybe next year. But it will happen and it will be a good firework. Have your popcorn ready.