Credit crisis: is this just the beginning?

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Several experts are saying that credit crisis (the so-called subprime-mortgages crisis) has just begun, and it is going to last a long time. It’s worth to go in-depth with this reasoning, because even if one may hope future won’t be as dark as someone draw it, it allow to better understand what’s going long. Let me warn you that this is a long story, so I’ll have to write this story in a few installments. But let’s start to see what’s happening.

Credit crisis is caused by a too high credit/debt level, unbearable for global economic system. Some analysts compare this situation with what happened in Japan between 1990 and 2003, when country economy sharply declined after credit bubble blowup: Nikkei index lost 80% in 13 years (from 38916 in december 1989 to 7607 in april 2003). Some other, a little less pessimistic, figure out something like USA market stagnation between 1960 and 1975.

The common point is clear: we are coming from years when there have been too much liquidity, too much leverage and too much financial engineering, that created a bubble that is going to blow, causing hard times for investors. Surely, the many who borrowed money beyond his means has to be blamed, but there are more significant responsibilities:

  • regulation bodies, that left many US banks to transfer billions of risky credits to foreign savers, in many not-so-transparent ways;
  • hedge fund and pension fund manager, that abused leverage, to an extent that maybe themselves did not understand;
  • financial engineers, that developed “statistic security” models for credit, that showed fo be faulted.

Some economists think that there was a push to “easy lending” because many were interested in buying debt. A reasoning that can seem strange, but it’s much more easy to understand if you, instead of seeing the lent money from the borrower perspective, you see it as a way, for who lends the money, to generate a cash-flow, and maybe to build some kind of derivatives upon it. []