Saturday, February 24, 2007

Credit Trouble

The real estate market continued to deflate in January, not so much here in Utah but in substantial chunks of the rest of the country. Frankly that deflation isn't the biggest problem the downturn is causing. Take a look at the carnage in the subprime lending market. The lenders who were shoveling money to folks who didn't really qualify are going belly-up faster than fish near a Union Carbide plant, and that's having an effect on the lending market as a whole. The credit crunch is starting to happen.

Normally, a credit crunch comes only once a recession is well under way. Currently, we have a credit crunch beginning, and while the economy is soft, we do not have a recession. Many folks are trying to figure out why things are backward. I explained why in this blog over a year ago (See "The Reason," 6 December 2005.). The economy has been surviving for years by maximizing leverage and by creating new methods of leveraging to increase the maximum. Since the dot com bust, the only thing keeping the economy afloat has been real estate leveraging. Subprime loans created created false demand, false prices, and false equity. Now all the janitors and fry clerks who were talked into buying McMansions by misstating their incomes are defaulting on their loans, those loans are losing value on the secondary market, and the capital markets are taking an inevitable hit, meaning money will become scarcer and more expensive. Since nothing else has been driving the economy, expect the economy to soften to the point of pablum.

Now doth prosperity mellow and drop into the rotten jaws of death.