04/12: ICEBERG
It is said that we often can only see the tip of an iceberg - the bulk of the thing is invisible underwater.
Perhaps we can use an iceberg as analogy for the current credit problems?
We have long blogged here that a transition from spending to saving would arrive someday in the US - while always acknowledging that we did not know when. It seems that we are here as the US economy has just run into an iceberg in the form of declining credit avaialbility.
I know, you are still getting Capitol One credit card solicitations in the mail. That is not the point.
Banks are being forced to write down the value of their assets because of the credit debacle. Lower assets leads to lower equity leads to a smaller loan book. This is a given because regulations require banks to maintain minimum ratios of loans to eauity. Banks have circumvented these rules in recent times by investing in off balance sheet vehicles called Special Investment Vehicles (SIV's). This Enron-like activity is now coming back to bite them as many of the SIV's are no longer viable. Banks are being forced (and this will accelerate) to take back the bad investments these SIV's made (aka toxic waste) and reinstate them on their balance sheets at real market value - often 30% - 60% below face value. This in turn will reduce bank equity. Lower bank equity = less credit.
I have long wondered what crisis it would take to cause us as a nation to stop overspending. Now I know. Goldman Sachs estimates the current carnage might lead to a total reduction in credit of up to $2 Trillion (in the US economy). Ouch!
Seems likely our saving rate is about to spike.
OSF
December 4 2007
Perhaps we can use an iceberg as analogy for the current credit problems?
We have long blogged here that a transition from spending to saving would arrive someday in the US - while always acknowledging that we did not know when. It seems that we are here as the US economy has just run into an iceberg in the form of declining credit avaialbility.
I know, you are still getting Capitol One credit card solicitations in the mail. That is not the point.
Banks are being forced to write down the value of their assets because of the credit debacle. Lower assets leads to lower equity leads to a smaller loan book. This is a given because regulations require banks to maintain minimum ratios of loans to eauity. Banks have circumvented these rules in recent times by investing in off balance sheet vehicles called Special Investment Vehicles (SIV's). This Enron-like activity is now coming back to bite them as many of the SIV's are no longer viable. Banks are being forced (and this will accelerate) to take back the bad investments these SIV's made (aka toxic waste) and reinstate them on their balance sheets at real market value - often 30% - 60% below face value. This in turn will reduce bank equity. Lower bank equity = less credit.
I have long wondered what crisis it would take to cause us as a nation to stop overspending. Now I know. Goldman Sachs estimates the current carnage might lead to a total reduction in credit of up to $2 Trillion (in the US economy). Ouch!
Seems likely our saving rate is about to spike.
OSF
December 4 2007
