Credit Bubble?

Sybil’s Star outlines the greatest risk that our current Economy faces, which is the leveraging of risk by the Credit establishment; study of the Great Depression of 1929 found the same identical factor collapsing the economy, only that time, it was integral to the Banking system itself. Why does Anyone engage in leveraging of risk if it can become so dangerous? The reason remains simple: it is the fastest method to attain great Wealth with little starting capital. The trouble lay in the reality much of such Wealth consists only of Paper, which is crushed and shredded in a strong economic wind.

The commentary of Doug Noland presents excellent material for contemplation, if you can withstand the impact of massed statistics. Some excellent quotes from the article:

November 10 – Bloomberg (John Glover): "Sales of so-called collateralized debt obligations have surged about 50 percent to almost $700 billion this year, according to Barclays Capital. Investment banks create the obligations by taking pools of bonds and credit derivatives and slicing them into chunks bearing different levels of risk with ratings from the top AAA to the riskiest so-called equity portion, which isn't rated. The popularity of the instruments is holding down yield premiums as banks buy debt to put into the securities…"

Today, in the euphoric late-stage of this historic Credit boom, the attribute of "The Moneyness of Credit" has created virtually insatiable demand for $ Trillions of Credit instruments – top-rated and perceived highly liquid. And, as we’re witnessing, the greater the degree of Credit excess, along with resulting asset inflation and economic booms, the further the "Moneyness" attribute gravitates out the risk spectrum – and the greater the gulf between the perception of safety and liquidity and the reality of highly risky Credits acutely vulnerable to a reversal in the Credit Cycle.

A major problem with the current monetary boom – the "Moneyness of Credit Bubble" – is the enormous and widening gulf between the market's perception of safety and liquidity and the acute vulnerability of the actual underlying Credits

There may be Some who are lost by the terminology of the article, but it is really somewhat simple in principle. Almost every Banking and Corporate organization has been selling Risk by use of leveraged credit instruments for set Interest payments. The People who are buying this Risk, though, are selling their own Risk utilizing leveraged credit instruments, so they are responsible for only the denominated Interest payments. Can We understand the Trend which has developed? Does it seem like the old Pyramid Letter scheme? Well, many including this author think the whole process is only fancier. What could go wrong? What happens when one leveraged level cannot meet it's obligations? It starts a chain reaction with successive links in the chain not being able to meet their obligations. The original Risk initially centered in one enterprise has now spread through several levels, and through their economic contacts, throughout the entire economy. The failure of one enterprise, or one industry, could bring down the whole economy. lgl