It’s time to sit up and take notice. The times have changed, and nobody seems to be setting up shop on Easy Street anymore.
What About Wall Street?
It is abundantly clear that the so-called sub-prime mortgage debacle may be just the tip of the iceberg of problems in modern finance markets. Easy to obtain, cheap credit is the great lubricant that makes the engines of commerce really hum. Unfortunately these lubricating characteristics are the part of the formula that ultimately causes the credit system to break down.
Credit availability is largely a function of the lender’s confidence to be paid back with reasonable interest. Unfortunately, there are fewer institutions, or individuals, that find they have enough confidence in borrowers to lend money without what would have been significantly excessive guarantees or collateral just six months ago. One reason short-term Treasury Notes are yielding so little interest is that many investors are buying them just to preserve value because they can’t be sure that many of the traditional money funds, and the other so-called secure short-term investments, are not turning out to be secure and illiquid.
What About Wall Street?
We all remember Jimmy Stewart in It’s a Wonderful Life, the run on his little bank and what a pickle it put him in. Well, it is the same story today except that the bank is now the whole international financial system, and it appears to be in trouble because of lending unlikely to be paid back or having the collateral to cover the debt. Thank you, Wall Street, for inventing these "innovative" ways to create credit that appear to be safe, but manage to fail to be repaid just after Wall Street sells it.
You might ask how could we, as mere mortals, have known what was going on? There is an easy-to-read little book called, A Short History of Financial Euphoria, written in 1996 by John Kenneth Galbraith, the famous and witty economist. The book not only tells of similar events in history, but more important, tells how to identify the next wave of "euphoria."
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