Comments on: THE CREDIT COLLAPSE CONTINUES http://pragcap.com/the-credit-collapse-continues Tue, 16 Mar 2010 16:05:31 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Mikie http://pragcap.com/the-credit-collapse-continues#comment-8355 Mikie Tue, 03 Nov 2009 13:00:16 +0000 http://pragcap.com/?p=11965#comment-8355 From that graph it appears consumer credit growth has averaged 6-7% over the last few decades. That makes sense in our fractional res. banking system as interest rates have averaged the same 6-7% and as such this has allowed banks 'organically' grow credit as deposits grew by a similar amount, keeping their capital ratio's intact The problem over the last decade is that as interest rates collapsed banks could only grow credit at the same amounts they were used to by leveraging up that bit more (ie credit growth outpacing deposit growth). Further, securitisation and the exponential growth in credit derivatives allowed this to happen with regulators barely noticing. As such to keep credit growing at 6-7% banks were synthetically taking on more and more risk. Its almost as if we were so hooked on 7% credit growth we needed securitisation to fudge it as it couldnt happen 'organically' like it had in decades before with higher deposit rates growing the deposit base naturally So, here we are, the credit derivative securitisation game is up, banks are heading back to historical capital / leverage levels, Interest rates are zero and as such deposit growth is barely growing...so how exactly do we expect to get back to growing credit anything like the past without the banking system adding leverage to their balance sheets? Basically I cannot see how its possible as the banking system will be at the margin reducing leverage not adding to it for a very long time From that graph it appears consumer credit growth has averaged 6-7% over the last few decades. That makes sense in our fractional res. banking system as interest rates have averaged the same 6-7% and as such this has allowed banks ‘organically’ grow credit as deposits grew by a similar amount, keeping their capital ratio’s intact

The problem over the last decade is that as interest rates collapsed banks could only grow credit at the same amounts they were used to by leveraging up that bit more (ie credit growth outpacing deposit growth). Further, securitisation and the exponential growth in credit derivatives allowed this to happen with regulators barely noticing. As such to keep credit growing at 6-7% banks were synthetically taking on more and more risk. Its almost as if we were so hooked on 7% credit growth we needed securitisation to fudge it as it couldnt happen ‘organically’ like it had in decades before with higher deposit rates growing the deposit base naturally

So, here we are, the credit derivative securitisation game is up, banks are heading back to historical capital / leverage levels, Interest rates are zero and as such deposit growth is barely growing…so how exactly do we expect to get back to growing credit anything like the past without the banking system adding leverage to their balance sheets?

Basically I cannot see how its possible as the banking system will be at the margin reducing leverage not adding to it for a very long time

]]> By: GreenAB http://pragcap.com/the-credit-collapse-continues#comment-8353 GreenAB Tue, 03 Nov 2009 10:30:20 +0000 http://pragcap.com/?p=11965#comment-8353 one caveat as far as lending to companies goes: banks are effectively transferring credit risk from their balance sheets onto the bond markets. an overwhelming part of new issued corporate bonds are being used to pay down/refinance existing bank debt. http://blogs.wsj.com/economics/2009/10/13/too-cash-strapped-to-brag-companies-arent-using-borrowing-to-spend/ so if we want to judge lending as a whole we should include in part the wave of corporate bond issues. (but even with that aqddition i guess we´re still shrinking at an incredible pace) another indication that appetite for credit by companies is low are utilization rates: http://blogs.wsj.com/marketbeat/2009/10/22/banks-borrowers-appetite-for-loans-are-feeble/ BTW I love your blog! one caveat as far as lending to companies goes:

banks are effectively transferring credit risk from their balance sheets onto the bond markets.

an overwhelming part of new issued corporate bonds are being used to pay down/refinance existing bank debt.

http://blogs.wsj.com/economics/2009/10/13/too-cash-strapped-to-brag-companies-arent-using-borrowing-to-spend/

so if we want to judge lending as a whole we should include in part the wave of corporate bond issues. (but even with that aqddition i guess we´re still shrinking at an incredible pace)

another indication that appetite for credit by companies is low are utilization rates: http://blogs.wsj.com/marketbeat/2009/10/22/banks-borrowers-appetite-for-loans-are-feeble/
BTW I love your blog!

]]> By: GreenAB http://pragcap.com/the-credit-collapse-continues#comment-8351 GreenAB Tue, 03 Nov 2009 07:49:16 +0000 http://pragcap.com/?p=11965#comment-8351 one caveat as far as lending to companies goes: banks are effectively transferring credit risk from their balance sheets onto the bond markets. an overwhelming part of new issued corporate bonds are being used to pay down/refinance existing bank debt. http://blogs.wsj.com/economics/2009/10/13/too-cash-strapped-to-brag-companies-arent-using-borrowing-to-spend/ so if we want to judge lending as a whole we should include in part the wave of corporate bond issues. (but even with that aqddition i guess we´re still shrinking at an incredible pace) another indication that appetite for credit by companies is low are utilization rates: http://blogs.wsj.com/marketbeat/2009/10/22/banks-borrowers-appetite-for-loans-are-feeble/ one caveat as far as lending to companies goes:

banks are effectively transferring credit risk from their balance sheets onto the bond markets.

an overwhelming part of new issued corporate bonds are being used to pay down/refinance existing bank debt.

http://blogs.wsj.com/economics/2009/10/13/too-cash-strapped-to-brag-companies-arent-using-borrowing-to-spend/

so if we want to judge lending as a whole we should include in part the wave of corporate bond issues. (but even with that aqddition i guess we´re still shrinking at an incredible pace)

another indication that appetite for credit by companies is low are utilization rates: http://blogs.wsj.com/marketbeat/2009/10/22/banks-borrowers-appetite-for-loans-are-feeble/

]]> By: jt26 http://pragcap.com/the-credit-collapse-continues#comment-8337 jt26 Mon, 02 Nov 2009 23:37:09 +0000 http://pragcap.com/?p=11965#comment-8337 Consumer lending always decreases during recessions. And, considering the bubble of 2002-2005, one would expect and hope for an even bigger decrease. No doubt, unproductive sectors of the economy will be in a depression. But, business credit, at least for large businesses looks good, which means that they are in a position to invest to enhance productivity, develop new products. Good bye to the days of everyone getting a new SUV every 3 years; hello to more efficient and recyclable autos, better public transport, computerized traffic management. Consumer lending always decreases during recessions. And, considering the bubble of 2002-2005, one would expect and hope for an even bigger decrease. No doubt, unproductive sectors of the economy will be in a depression. But, business credit, at least for large businesses looks good, which means that they are in a position to invest to enhance productivity, develop new products. Good bye to the days of everyone getting a new SUV every 3 years; hello to more efficient and recyclable autos, better public transport, computerized traffic management.

]]> By: AWF http://pragcap.com/the-credit-collapse-continues#comment-8332 AWF Mon, 02 Nov 2009 21:43:36 +0000 http://pragcap.com/?p=11965#comment-8332 Good Stuff frm DR good rule of thumb If the banks arn't lending The economy is ending Good Stuff frm DR

good rule of thumb

If the banks arn’t lending
The economy is ending

]]> By: BleakoEcobamics http://pragcap.com/the-credit-collapse-continues#comment-8326 BleakoEcobamics Mon, 02 Nov 2009 20:17:52 +0000 http://pragcap.com/?p=11965#comment-8326 Oh, I should add, I saw an article -- I believe was in CFO magazine by a Duke B-school professor -- that boiled down to companies aren't investing in positive NPV projects. So the question may for companies may be whether they trust the inputs ... low and stable discount rate, steady (or any) cash flows/return, etc. I would be very interested to be a fly on the wall for those conversations, what goes into the sausage is often scarier than the sausage itself.... Oh, I should add, I saw an article — I believe was in CFO magazine by a Duke B-school professor — that boiled down to companies aren’t investing in positive NPV projects. So the question may for companies may be whether they trust the inputs … low and stable discount rate, steady (or any) cash flows/return, etc. I would be very interested to be a fly on the wall for those conversations, what goes into the sausage is often scarier than the sausage itself….

]]> By: BleakoEcobamics http://pragcap.com/the-credit-collapse-continues#comment-8325 BleakoEcobamics Mon, 02 Nov 2009 20:11:39 +0000 http://pragcap.com/?p=11965#comment-8325 The deleveraging process stay irrational longer than the US government can stay solvent. The deleveraging process stay irrational longer than the US government can stay solvent.

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