Credit Wars

As autumn gloom casts a pall over the nation, and frightened investors cling ever more tightly to their pumpkin spice lattes, life apparently continues on its steady course without regard to the looming clouds which threaten financial chaos.

Main Street, though, has finally witnessed for itself a token sign of the credit crisis which began in February of 2007, as it sees supposedly qualified car buyers who are unable to qualify for loans. I suppose that it’s pointless to argue that if they can’t qualify for loans then they aren’t “qualified buyers.” If we’re going to be honest with ourselves, we should admit that it is very likely that these people probably shouldn’t have ever been given loans – to say nothing of the fact that these people would need more credit to buy gas for the cars they can now suddenly not “afford.” I wonder if, when people start getting cars repossessed, we will see an outcry against the “greedy lenders” the way we have seen with the housing crash.

Don’t make the mistake of assumimg that we are now gently slipping back into more reasonable lending practices as we learn from our mistakes. Just when we thought that ninja (no income / no job / no assets) loans were the the height of “irresponsible” lending, we now have shared-appreciation loans as the Fed has suggested – as if lending “innovation” is what we need.

If you thought the international banking system was going to let us slide into a depression and credit contraction – don’t be too sure. During the week when the House of representatives failed to pass, and then passed the $0.7 trillion bailout plan, the Federal Reserve created one trillion new dollars as they took on completely worthless “assets” as collateral from banks in exchange for “short term” loans.  Meanwhile, the stock market lost a trillion dollars.  The truth of the matter is far more dangerous anyway: there are a total of approximately one quadrillion in derivatives, much of which is so arcane that only a few people understand what they are.   It’s probably important to point out that this is vastly more money than actually exists.  Oh what tangled webs we weave…

You can be sure that for every action the market takes to contract credit, there will be an equal and opposite reaction by the central banks to expand credit. We do not know whether or not they will succeed, but we can be sure that they will try to keep the system afloat.  And why shouldn’t they?  Central banks, issue currency as debt, which we here call credit, but of course a “credit card” is really a “debt card” if you view it from a certain perspective.  So if the central banks issue currency through debt (loans), then where does the money come from to pay the interest on these loans? Let’s just say that the entire system is dependent on more and more money coming into existance through loans, and when that isn’t the case… things turn ugly very quickly.