Credit crunch triggers $2 trln drop in debt underwriting

cmartenson · April 7, 2008, 5:46am

Our money system requires that ever larger amounts of new credit be issued or else the banking system becomes really unhappy. Consumers with credit cards is one form of credit, mortgages another, but the a really, really huge piece of the credit pie is the corporate debt markets. This article points out that a massive shortfall in this arena has happened.

BOSTON (MarketWatch)- April 3, 2008 - The credit crisis that began in July has been responsible for global debt underwriting volumes falling by more than $2 trillion and by $1.3 trillion in the U.S., on a period-over-period basis, analysts at Oppenheimer & Co. said in a research note. "As more than 80% of corporate funding came from the capital markets during 2007, we can't help but believe that such a massive extraction of liquidity from the market will have a profound impact on the U.S. economy," they wrote. "As bank balance sheets show similar strain to brokers' own balance sheets, there is little room in the system to 'pick up the slack' vis a vis corporate lending."

The story here is that several very significant areas of borrowing are being curtailed raising the obvious question. "where will the new borrowing come from?"

We are now seeing declines in:

Home mortgages
Auto loans
Corporate borrowing

I would expect it's only a matter of time before we see actual declines in commercial and industrial loan amounts, and even credit card debt, as well. This credit bubble is well and truly bursting, and I am not at all comforted by the unprecedented and possibly illegal maneuvers by the Fed these past couple of weeks. Rather, they seem to speak of an even larger problem that we've not yet been told about.

Okay, so the forecast of a fall in commercial loans is not all that astute. I mean, check out the recent data:

Vacant Shopping Centers

Vacancies at community and neighborhood shopping centers in the United States rose in the first quarter to the highest level in more than a decade, and rent growth was the lowest since the last recession, the research firm Reis reported on Friday. The average vacancy rate rose to 7.7 percent from 7.1 percent a year earlier. It was the highest since 1996, the real-estate researcher said. Demand for retail space is being hurt by a drop in home prices and sales, rising food and gasoline costs, and job cuts, Reis said.

It's not much of an analytical stretch to go from decade highs in retail vacancy to predicting a fall-off in construction loans. So we can pretty much put that one in the bag.

This is a companion discussion topic for the original entry at https://peakprosperity.com/credit-crunch-triggers-2-trln-drop-in-debt-underwriting-2/