(Interesting stuff 10 pm – promoted by ek hornbeck)
That graph was posted alongside this article in the NYT, and it pretty much captures the unprecedented nature of the credit crisis we’re going through this autumn. In several sectors of the financial world, lending quite simply stopped. Leveraged buy-outs, the big story of the past 18 months, no longer exist. Asset-backed paper is seen as “toxic waste”, and no longer provided – it continues to exist in so far as banks would rather roll over paper that cannot be repaid rather than make all the underlying losses appear in plain sight.
As lending prior to that had been extravagantly exuberant, this is not having an immediate impact for many companies, which have sound balance sheets and advantageous existing credit lines, but as it drags on, the real economy will start to feel the pinch as it needs to finance or refinance its normal activities, let alone investment.
Meanwhile, in the sector at the heart of the whole crisis, US real estate, things are getting steadily worse. Prices are now dropping all across the board, sales volumes are dropping, and, logically, available stocks of houses for sales are reaching unprecedented highs, as the graph shows (via Financial Sense). That overhang of houses for sale points to further drops in prices, which means that pain is only beginning.
In practice, growth of the past 5 years has been based exclusively on the debt buildup, with no actual increase in real incomes. As the credit crunch wipes out that unsustainable debt bubble, we’ll have to fall back to what can be sustained with existing levels of income, ie somewhere in the vicinity of the GDP of the year 2000. This may not sound so bad, but, as we know, such changes are not straightforward, and the movement towards an increasingly unequal sharing of income will not be reversed easily; pain will not be spread equally across the economy, and it’s highly likely that the weak will bear the brunt of it, unless solidarity, equality and fairness become dominant political principles once again.