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A ‘Graphic’ View of the U.S. Credit Collapse

Posted by Larry Doyle on December 14, 2010 6:28 AM |

If a picture paints a thousand words, then the graphs I am highlighting today would encompass many volumes. I thank the regular reader of Sense on Cents who brought them to my attention. Major prop to Barry Ritholtz of The Big Picture who ran this commentary yesterday. Major credit to the writer at the Global Macro Monitor blog.

The Global Macro Monitor blog was started by an independent trader and economist and, in a prior life, was a global macro hedge fund PM/trader, headed emerging market bond trading desks on Wall Street, and an economist/global strategist, beginning his career at the World Bank in the mid 1980’s. His unique and unconventional views are reflected on his website at marcromon.wordpress.com.

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We constructed these charts with data from today’s release of the Federal Reserve’s Flow of Funds. They are both stunning and frightening as they illustrate the cardiac arrest that took place in the credit markets. The collapse in credit issuance/borrowing began in 2008 and would have been net negative without the Federal government. In 2009, for example, the Federal government was 141 percent of total net credit borrowings.

If, as the President says‘the flow of credit is the lifeblood of our economy”, the country would have died in 2009 had not the policymakers taken the extraordinary measures they did. These charts illustrate how close we were to the abyss and should give a clearer perspective on what Bernanke & Co. were/are up against. They are heroes, in our book, for stabilizing the situation and pulling us back from the abyss. The jury is still out, however, on long-term structural adjustment and preventing a global sovereign debt crisis.

Thank you to the reader for bringing this work to my attention. Thank you Barry for widely disseminating the work. Major commendation to the writer at the Global Macro Monitor blog for producing this graphic view of our economy and flow of credit over the years.

Just how long can Uncle Sam or dare I say Big Ben Bernanke continue to provide the props to our economy? While there are serious questions about the lack of credit supply, where is the credit demand? How much credit demand has actually been ‘pulled forward’ via an array of government programs?

As I have often highlighted the ‘shadow banking system’ (that is the securitization businesses on Wall Street) provided 40-45% of the total credit which flowed through our economy. That shadow banking system largely collapsed and is certainly forever changed. Our economy is now trying to adapt as massive structural changes are underway. This adaptation takes time and is painful. We are living that. How soon might we adapt? Do not hold your breath.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • rayllove

    Larry,

    I’m a bit confused as to why you say that there are “serious questions about the lack of credit supply”. A few months back for example, the CEO of Illinois Tool said he could borrow many billions at historically low rates if he had any use for the funds, but, his company was then running well below full-capacity and, it therefore of course made little sense to expand. Then too, excess liquidity in the US is causing the infamous ‘spillover’ effect across the globe. Plus, the recession was unleashed by excess liquidity that was in part feed by foreign inflows, and of course bubbles are not possible without excess supply of investment capital.

    Just curious?

    • LD

      I believe that those who may qualify for credit do NOT have the need much like the company you reference, while those who would like the credit, do not meet the HIGHLY ENHANCED CREDIT HURDLES developed by the banks.

      In short, “if you need it you can’t get it BUT if you don’t then it is available.”

  • Bud

    Larry,

    If, as the President says, ‘the flow of credit is the lifeblood of our economy”, the country would have died in 2009 had not the policymakers taken the extraordinary measures they did. These charts illustrate how close we were to the abyss and should give a clearer perspective on what Bernanke & Co. were/are up against. They are heroes, in our book, for stabilizing the situation and pulling us back from the abyss. The jury is still out, however, on long-term structural adjustment and preventing a global sovereign debt crisis.

    Are they really heroes for stabilizing the situation and pulling us back from the abyss if they CAUSED the crisis in the first place? What greater responsibility does the Fed have than to keep the markets open? They piled up the fuel by ignoring the utter collapse in mortgage underwriting standards and the bubble in real estate and by refusing to regulate the derivatives market.

    Then they lit a match by allowing Lehman to fail. Geithner and the Fed in general (particularly Greenspan and Bernanke) were sound asleep at the wheel. For example, they didn’t even know what A.I.G. was doing in the CDS market.

    According to accounts of the crisis like David Wessel’s In Fed We Trust and Andrew Ross Sorkin’s Too Big to Fail, Geithner first discovered that AIG posed a potentially catastrophic risk to the global economy just as he and the rest of the Fed were frantically trying to persuade Bank of America to take over Merrill Lynch while searching for a buyer for Lehman Brothers in order to prevent the largest bankruptcy in the history of the planet.

    It’s not easy to improvise a bailout for a company you knew nothing about the day before while the world is going to hell. http://www.time.com/time/business/article/0,8599,1953864,00.html

    Is the fireman who saves people from a burning building a hero if he started the fire?

    Happy Holidays,






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