Biggest Credit Bubble of All Time

3 posts / 0 new
Last post
Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Biggest Credit Bubble of All Time

The biggest credit bubble of all time was one that was totally off the radar screen of the Fed, the Federal Government and the vast majority of people, institutions and commentators.

It was a long time in the making. 

The assets that comprised this bubble were considered safe.  They were AAA rated.

No one ever thought the assets or the collateral could decline in value.

Borrowers threw caution to the wind.  They borrowed more and more and more because they "could."  The spent the money freely on things they did not need and could not afford.

Lenders threw caution to the wind.  They relaxed their lending standards and freely loaned money in copious amounts to borrowers who were far in over their head on the dubious assumption that they were good for it and would continue to be good for it for 10, 20 and 30 years.  Their vetting standards went out the window.

The "assets" were packaged up into different kinds of securities -- short term and long term -- and sold and traded on the open market like candy.

Foreign banks and other foreign investors bought these things up in great quantities.

The bubble grew and grew until, eventually, there was no one else left who was willing or able to buy the assets anymore. 

Suddenly it was realized that the money could not/would not be paid back as promised.

When the bubble popped, institutions suddenly found themselves with vast quantities of these assets that no one wanted.  They were caught holding the bag.  They would have dumped them -- and tried -- but suddenly no one had any use for them because it was realized that they were not worth the paper they were printed on.  This created a nasty downward spiral.

Values plummeted.  The money dried up.  Lenders found that the things they regarded as valuable assets weren't worth so much.  Borrowers found themselves in over their head with no one left willing to lend.  Defaults led to declining values, and declining values led to more and more defaults.

You may think I have just summarized the real estate/mortage bubble, and I suppose I have.  But isn't this also the DOLLAR bubble?  And why, in goodness name, should it be any different?

 Oh, wait, there is a difference:  The mortage bubble was at least backed by something tangible.

 

tictawk's picture
tictawk
Status: Member (Offline)
Joined: Aug 25 2008
Posts: 10
Re: Biggest Credit Bubble of All Time

The largest bubble of all is DOLLAR denominated debt.  Given that debt and credit are the opposite ends of the same coin, we need to recognize that a debt collapse is the disappearance of Credit.  A falling dollar reduces the effective burden on the debtor but it also destroys the saver, the pensioner, the retirees, and eventually the economy. 

The only weapons at the Fed's disposal are a jawbone and the monetary spigot.  At some point the debt MARKET will dictate terms that will be very onerous to the borrower.  The Fed is not going to be able to print their way out of this mess because the debt and liabilities are simply too large.  They were given a lot of rope and now they are hung.  We will see a collapse in lending that will crush the Fed's ability to monetize.  All debt must be reconciled via paydown or default.  It is only after that, I think there may be a huge potential for hyperinflation but by then I think much will have transpired (economic collapse) and the Fed will not be in a positon to do much damage. 

 

tictawk's picture
tictawk
Status: Member (Offline)
Joined: Aug 25 2008
Posts: 10
Re: Biggest Credit Bubble of All Time

The largest bubble of all is DOLLAR denominated debt.  Given that debt and credit are the opposite ends of the same coin, we need to recognize that a debt collapse is the disappearance of Credit.  A falling dollar reduces the effective burden on the debtor but it also destroys the saver, the pensioner, the retirees, and eventually the economy. 

The only weapons at the Fed's disposal are a jawbone and the monetary spigot.  At some point the debt MARKET will dictate terms that will be very onerous to the borrower.  The Fed is not going to be able to print their way out of this mess because the debt and liabilities are simply too large.  They were given a lot of rope and now they are hung.  We will see a collapse in lending that will crush the Fed's ability to monetize.  All debt must be reconciled via paydown or default.  It is only after that, I think there may be a huge potential for hyperinflation but by then I think much will have transpired (economic collapse) and the Fed will not be in a positon to do much damage. 


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments