Credit Markets Will Be Tight For Some Time
The Fed looks like it’s willing to pull out all the stops during the current financial crisis but despite all that, a tight credit market will continue for some time. Financial institutions will remain cautious with their capital until the final costs of the sub prime mortgage collapse is fully realized.
The lesson of Bear Stern’s near collapse fresh in their minds, financial institutions are hoarding their cash waiting for the next round of write downs. Banks are reluctant to enter into long term loans when they might need those funds in the near future to meet margin calls or otherwise suffer Bear’s fate.
Securitization allowed banks to transform a bundle of illiquid loans into a series of liquid securities tradable on secondary markets. Demand for any sort of collaterized debt has pretty much dried up, making it difficult for banks to roll over their loans.
Credit can be quite difficult to obtain these days for both individuals and corporations. Mergers and acquisitions have slowed to a crawl due to lack of financing. This also has an effect on business spending as many companies are having to delay work on capital projects.
The Fed may have slashed interest rates but mortgage rates still remain relatively high. Even those with good credit ratings are finding it tough right now. It’s hurting demand in an already weak housing market and will delay any sort of recovery.
Many analysts are predicting that the tight credit market will most likely continue past the end of this year and into the next. Even if the economy doesn’t go into a recession, it will slow to a crawl for some time.
