Has the worst of the financial crisis passed?
“Yes,” said the world’s richest man over the weekend. Warren Buffett told his shareholders that the “worst of the credit crisis on Wall Street is over.”
Maybe he’s right. But let’s look at the numbers. In 2006, alone, nearly $7 trillion of new debt was issued worldwide. Maybe double that amount in the entire five-year period – 2002-2007. So far, says Bloomberg, since the beginning of 2007, less than $200 billion has been written off. You can do the math yourself, but to me that means total losses so far probably don’t exceed 1% of the debt sold in the last 5 years.
So far, so good? The Fed has now cut rates 7 times. And it now takes on its balance sheet – as collateral for loans – the very credits that are likely to go bad…credit card debt, student debt, and even car loans. It has only 200 basis points left, before it gets to zero, and there are approximately $10 trillion (just guessing) worth of credits that still could go bad. If just 5% of them went bust…the loss would be $500 billion. Maybe the doom and gloom is underplayed. Moving bad debt from the people who deserve it to the Bank of All the Americans – the Fed – doesn’t turn the bad credits into good ones. It merely allows everyone to keep doing what they’ve been doing…that is, to keep pretending that everything is all right.
But everything isn’t all right. Far from it. And budding out in our brain is the idea that the situation can’t be fixed…and that a major breakdown may be on its way…
Let Me Eat Cake! 