Is There a Credit Crisis?

Turn on the morning news programs and there are suggestions that a new great depression may be looming around the corner. The fear is a direct result of the events over at Bear Stearns this weekend.

The world financial markets was working in overdrive through the weekend, till the amazing $2 a share deal of Bear Sterns from JP Morgan. You have many factors and loses are play here. First, is the 14,000 employees of Bear Sterns. I know first hand that many of the employees are beyond fearful. Bear Stearns is (WAS) a culture of very cocky and brash individuals. After losing their big stick swagger, looks like the job boards will be flooded with candidates.
- Hate.info

I have been saying for nearly two years, that this is the first time that we have had a negative savings rate since the great depression, but are we in a credit crisis?

Alan Greenspan (former chairman of the US Federal Reserve) wrote recently,

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes – those belonging to builders and investors – have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic.

The American housing bubble peaked in early 2006, followed by an abrupt and rapid retreat over the past two years. Since summer 2006, hundreds of thousands of homeowners, many forced by foreclosure, have moved out of single-family homes into rental housing, creating an excess of approximately 600,000 vacant, largely investor-owned single-family units for sale. Homebuilders caught by the market’s rapid contraction have involuntarily added an additional 200,000 newly built homes to the “empty-house-for-sale” market.

OK, so what do we need to do. Simply put, we need to change our ways. As I have said on this blog the last 2-years and Dave Ramsey has said for much longer, save and live off the saved cash.

But Kevin, if we do that the economy would get even worse.

Yes, that is true. However, once people started living on cash and not credit the economy would get stronger.

The problem is that not only are the citizens living on credit, so are our governments. As a result our economy is falsely lifted by spending of money that we don't have. So, yes, the economy will fall, but can rise to new heights once we, as I have said already, are spending money that is already in the bank.

In Greenspan's article, he wrote:

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

The following cartoon from the Washington Post, helps explain the crisis.


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