Credit markets unfreeze…now, how about the economy?

An interesting trend recently has been the un-freezing of the credit markets.
As per Bloomberg, “Credit markets began to recover as the government started guaranteeing bonds sold by financial institutions, the Fed purchased commercial paper and the Obama administration introduced its fiscal stimulus package, said National Penn’s Barnes. The government has invested more than $250 billion in U.S. banks, insurers and credit-card companies.”

“Record Sales:  An increase in corporate bond sales …. Borrowers sold $223 billion of corporate bonds this year, up 61 percent from the same period in 2008 and 43 percent ahead of the record pace set in 2007, Bloomberg data show.”

This trend of easing of credit can be clearly seen in the latest TED-spread graph,which serves as a proxy for banks’ willingness to lend to each other.  See our discussion on LIBOR from GloboTrends.

tedsprd.gif

Back in September / October 2008, the graph clearly shows distress.  Bank to bank lending nearly ground to a halt.

While it may have been the freezing up of the credit markets that most people blamed for the deep economic downturn, I would argue otherwise.   I believe that the credit market freeze need not have translated into a global recession had it not been for the deep and protracted downturn in consumer confidence (especially in the USA).

I previously argued (see article here) that the American consumer was essentially oblivious to the troubles in the credit markets prior to September 2008.   While the “credit crisis” actually started in 2007, it wasn’t until Congress got involved did we see consumers get shell shocked, stop buying, and send shock waves through the global supply chains.

Blame Congress (and the financial media)

Until Congress got involved…. consumers kept spending, companies kept selling, importers kept importing, China kept producing, and commodity exporters kept on exporting.  Essentially, the “real” economy kept moving along as if the “TED spread” spike didn’t exist (or was too technical to worry about).   As late as the summer of 2008, it seemed as if the world economy had “decoupled” from the US, and would keep growing, producing, exporting, and life was fine.

Many analysts blame the fall of Lehman (and hence the Treasury for allowing them to fail) for the freeze up of the credit markets.  Perhaps they are right that this was a trigger point, but I believe that most US consumers were still oblivious to the trouble even after Lehman failed.  Well, maybe not completely oblivious, but they generally thought the troubles were just on “Wall Street” and didn’t effect “Main Street”….or….at least that’s how they DID think until Congress sold them otherwise (about how this bailout was for Main street, and not just for Wall Street).

My complaint is the way in which the public was sold on the “crisis” in order to get the money to fix the trouble.   Congress either (a) didn’t understand finance, or (b) used the opportunity to grandstand for the folks back home.  When they rejected the first TARP bill, the stock market tanked.  The shock on Wall Street of how “Washington didn’t get it”…led to a massive sales pitch to sell the crisis to the public (for this, I blame the financial media, especially CNBC).  In my opinion, it was this selling of the crisis that was the pivot point upon which the “credit crisis” turned into an economy wide “economic crisis”.

If only…

Fast forward to today…and the credit markets are working again.

An average $17.1 billion of corporate bonds traded daily this month, compared with $17.7 billion in January, according to the Financial Industry Regulatory Authority. The business is up from last year’s low of $9.4 billion in August and reached the highest level since February 2007, Finra data show.

Imagine for a minute how much better off we would all be had the credit-fix been done in private, or at least without as much fear mongering.  Had Congress not done their best to scare the public, the real economy would probably be still moving along.  Imagine if the credit “freeze” had just lasted till now, but the real economy hadn’t been sacrificed by politicians for false “anger” at the bankers.

Taking shots at bankers has become a popular sport in Washington these days, but I lay the blame of scaring the public squarely on Congress’s shoulders (with the help of the financial media).

“But I cant get a loan (at a decent price)”

The reason that rates are so high currently has nothing to do with “freezing” of credit markets…not anymore.  The rates are high now…not because of “frozen credit markets”, but instead because corporate defaults are expected to rise in the near future (because of a fall in the REAL economy, not in the credit markets).  As consumers quit spending, businesses are expected to fail (which then explains why banks dont want to lend).

Moody’s Investors Service forecast will rise to 16.4 percent by November, the highest since the Great Depression and about three times the current rate

Thanks Congress!

Read More:

  • LIBOR
  • http://www.bloomberg.com/apps/news?pid=20601087&sid=aRan_qqkjrAo&refer=worldwide

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Originally published at Globo Trends and reproduced here with the author’s permission.

6 Responses to "Credit markets unfreeze…now, how about the economy?"

  1. ex VRWC   February 20, 2009 at 3:57 pm

    I addressed revisionist tripe like this yesterday, that seeks to blame the media and the Congress for building up a crisis that has caused the downturn. I pointed out that the Bear takeover, the Fannie and Freddie nationalization, and the AIG nationalization all preceded the Lehman failure. Average Joe knows in his gut that this is a predictable collapse of a debt house of cards. You cannot pick a signpost along the way, such as the Lehman failure or the TARP debate, and pin the downturn on it. Sorry.

  2. Hardheaded Liberal   February 20, 2009 at 5:59 pm

    I suspect the prior comment is correct that the crisis would have continued to cascade without the public debate accompanying the passage of the TARP. It was the fact that the cascade had reached AIG that prompted the Bush Administration to sound the alarm. It was Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke who went to George Bush and then to the Senate Banking Committee crying that “The sky is falling! The entire economy will collapse if we don’t save the financial sector from its folly!” Typical of the Bush administration, they brought along a three page draft of an Act that would give Paulson unreviewable discretion to use $700 Billion in any way he saw fit to “bail out” the financial sector.Perhaps more important is that Mr. Butler inexplicably picks the wrong culprit. He insists Congress stirred up the public crisis:

    Until Congress got involved…. consumers kept spending, companies kept selling, importers kept importing, China kept producing, and commodity exporters kept on exporting. Essentially, the “real” economy kept moving along as if the “TED spread” spike didn’t exist (or was too technical to worry about). As late as the summer of 2008, it seemed as if the world economy had “decoupled” from the US, and would keep growing, producing, exporting, and life was fine.* * * * * *My complaint is the way in which the public was sold on the “crisis” in order to get the money to fix the trouble. Congress either (a) didn’t understand finance, or (b) used the opportunity to grandstand for the folks back home. When they rejected the first TARP bill, the stock market tanked. The shock on Wall Street of how “Washington didn’t get it”…led to a massive sales pitch to sell the crisis to the public (for this, I blame the financial media, especially CNBC). In my opinion, it was this selling of the crisis that was the pivot point upon which the “credit crisis” turned into an economy wide “economic crisis”.

    In fact, of course, Henry Paulson, with an assist from Ben Bernanke, injected the specter of wide-spread economic crisis into the consciousness first of George W. Bush, then Congress, and finally the public. And the public debate was prolonged by the congressional contingent from the “Party of No!” The House Republicans were the most egregious, but Richard Shelby (R-AL) and other Republican Senators also did their best to prolong the debate. And the debate would have been lost if the Bush administration and the President’s co-saviors of the economy in Congress had not moved to the theme that “bird flu on Wall Street will cause Main Street to catch pneumonia.”Further, I believe he is mistaken to claim there was a change in the rhetoric marshaled in support of passing the TARP after the bill was initially defeated in the House. My recollection (perhaps faulty) is that almost from the beginning of the debate in the House, when strong taxpayer opposition started flooding Congressional offices, that the consequences for Main Street became the major theme in support of passing the TARP.I have no clue what Mr. Butler’s motive is in posting this nonsense, but no one could rationally blame the Congressional debate for the collapse of business confidence and consumer confidence that followed the debate about passing the TARP. I conclude that Mr. Butler is either brain dead or he is intentionally misrepresenting what happened in order to blame Congress (and the Democratic Party?) for the economic crisis.And there is sufficient evidence to conclude Mr. Butler is not brain dead.

  3. Anonymous   February 20, 2009 at 9:37 pm

    Sorry but the credit markets are far from unfrozen…The only reason the TED spread has come back in is because the Fed has been pumping trillions of dollars of liquidity and guarantees into the system.

    • Brian Butler
      Brian Butler   February 25, 2009 at 7:49 am

      Credit markets in the traditional inter BANK sector seems to be functioning (as interbank lending, corporate bond markets, etc seem to indicate). My previous article addressed the root cause of credit market strains focusing on the fallout of the “shadow banking sector”….see: ( http://www.rgemonitor.com/financemarkets-monitor/255543/theres_a_hole_in_the_bucket )

  4. Jeff   February 20, 2009 at 10:30 pm

    I think there are valid doubts about whether the stimulus package will help. Of course, you can argue what will happen if there is no stimulus. But with this stimulus the federal deficit is likely to go even higher. I saw an interesting article, I think, onhttp://www.recessioninfocenter.com

  5. amy   February 20, 2009 at 10:31 pm

    Is thathttp://recessioninfocenter.com??