SIGNS OF THE TIMES - MAY 22, 2007
Dearth of Credit
May 24, 2007
"Falling home prices
and rising property tax assessments are fueling a grass-roots
-Wall Street Journal,
"Up until April, the market for risky loans was so lenient
borrowers could cut their interest rates simply by asking - rather
than providing anything to - investors.
"After a remarkably permissive first quarter, investors
put their collective foot down in April to slow the pace of refinancing
to a near halt."
-Wall Street Journal, April 27
"Binge Stirs Credit Fear
"John Lonski, Chief Economist at Moody's, said a surge in
high-yield bank credit facilities - term loans and lines of credit
with junk ratings - resembles the jump in subprime borrowing
at the end of the housing cycle."
-Financial Post, May 16
"Borrowing Binge Fuels U.K. Economic Worries
"Consumer debt soars as mortgage rates rise: banks draw
-Wall Street Journal, May 10
DEARTH OF CREDIT
The full understanding
of credit and its cycles has been provided by the Austrian School
of Economics. Its leading exponent has been Ludwig von Mises
and some of his comments bear witness to today's one-way excesses.
It is imperative to have an understanding of credit that works
in both financial and tangible asset booms.
"An increase in the quantity
of money or fiduciary media is an indispensable condition of
the emergence of a boom. The recurrence of boom periods, followed
by periods of depression, is the unavoidable outcome of repeated
attempts to lower the gross market rate of interest by means
of credit expansion. There is no means of avoiding the final
collapse of a boom brought about by credit expansion. The alternative
is only whether the crisis should come sooner as a result of
voluntary abandonment of further credit expansion, or later as
a final and total catastrophe of the currency system involved.
"The breakdown appears as soon as the banks become
frightened by the accelerated pace of the boom and begin to abstain
from further credit expansion. The change in the banks' conduct
does not create the crisis. It merely makes visible the havoc
spread by the faults which business has committed in the boom
"The dearth of credit which marks the crisis is caused
not by contraction but by the abstention from further credit
expansion. It hurts all enterprises - not only those which are
doomed at any rate, but no less those whose business is sound
and could flourish if appropriate credit were available. As the
outstanding debts are not paid back, the banks lack the means
to grant credits even to the most solid firms. The crisis becomes
general and forces all branches of business and all firms to
restrict their activities. But there is no means of avoiding
these consequences of the preceding boom.
"Prices of the factors of production - both material
and human - have reached an excessive height in the boom period.
They must come down before business can become profitable again.
The recovery and return to "normalcy" can only begin
when prices and wage rates are so low that a sufficient number
of people assume that they will not drop still more."
The Austrians did not distinguish
between financial and tangible asset booms, and did not provide
any examples or a forecasting model.
The latest FOMC stuff indicated the Fed was professionally worried
about "inflationary' pressures, which was keeping administered
The irony is that typically the senior central bank's changes
in administered rates are a number of months behind the change
in short-dated market rates of interest.
Since the high of 5.18% on February 23 the 3-month treasury bill
has plunged to 4.74%. This is beginning to look like rather a
fast move that senior central banks will dutifully follow.
As we noted in December 2000, interest rates going up indicates
that the boom is on and that falling rates indicate the boom
What's more, the bigger the boom the more dramatic the decline
in short-dated interest rates.
SIGNS OF THE TIMES - MAY 22,
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