All Markets Are Tight Near Equilibrium

Fri, 19 Sep 2008 12:12:03 +0000

I think that Louis Uchitelle commits the mild journalistic offense of burying the lede in his article in today's New York Times, "Pain Spreads as Credit Vise Grows Tighter." The thrust of the article is that the flow of credit is drying up for borrowers who may have in the past been able to get loans. Some examples he cites:

Remembering that we refer to the past when these loans would have gone forward as a bubble, it may very well be that these are extensions of credits that are not justified by previously appraised values of the assets or the income flow. There may be some examples above that would be justified by the fundamentals, but if the period of reference is the bubble before it burst, there will not be many. And it will take time to sort them out from the ones that wouldn't.

Here's the lede:

Mr. Rock, also chairman of the American Bankers Association, with 8,400 affiliates, does not see a problem in this turn of events.

“Now people are going to actually have to have a job to get a loan and they are going to have to make installment payments that are already higher per dollar borrowed than they used to be,” he said, arguing that the debt-fueled prosperity of the bubble years was unsustainable.

But there is not, for the moment, an adequate replacement.

The debt-fueled "prosperity" was a shift in the timing (forward) and the composition (into low-value sectors) of economic activity. If that could be done without subsequent penalty, we would do it all the time. So Mr. Rock has it right -- it was unsustainable and has come to an end. We now have to live with the vacuum and dislocation that comes in its wake.