Getting ready for Phase Two of the credit crisis

My column in the Times this weekend focuses on what's shaping up to be Phase Two of the credit crisis.

One year into this financial-system mess, U.S. regulators are facing up to the fact  that there are limits to what the government can and should do for severely wounded banks and brokerages.

That was signaled in a speech that Federal Reserve Chairman Ben S. Bernanke gave on Friday at an annual gathering of central bank officials in Jackson Hole, Wyo. Regulators, he said, need to be more disciplined in how they handle future shocks to the financial system, with the goal of "reducing the range of circumstances" in which the government steps in. Read the speech here.

As I note in the column, if regulators really are ready to play tougher with ailing banks and brokerages, they'll probably have plenty of opportunities to show their resolve: Another element of Phase Two of the crisis is likely to be a mass fire-sale of assets by financial companies that realize their only hope of survival is to shrink drastically.

But a fire sale will just put further pressure on bank and brokerage balance sheets across the board, raising more risk of failures.

Read the column here.

Thoughts? Comments?

Comments

[Norman Medina]

Currently, I am overseas; however, I access the website for So. Cal news.
Your comments about severly impacted banks and brokerages is taken with a grain of salt.
We are discussing major corporations at best.
More importantly, what is absent is how severly the average home owner has been impacted. Home owners do not have the capacity or wherewithal to acces additional funds as do banks and bokerages.
Banks and brokerages have the US government to bail them out. Home owners do not have that resilency. The ultimate impact is foreclosure.
Banks and brokerages merely purchase one an other.

[yogiudo]

In my opinion, we're headed for a credit based hyper-inflationary depression.

The risk of the economy seizing up and going into "deep freeze" of deflation is something that the FED are concerned about, and it is something they can prevent by printing more money and ultimately lending it out at 0% or even negative rates.

While this may help us avoid the deep freeze, it won't stop the onslaught of inflation - the value of real world items will increase against the obviously flawed Fiat currency system.

[James Monachino]

Phase Two of Credit Crisis:
Look for the Commercial lines of credit to begin to dry up, reorganize and tighten as businesses begin to feel the financial stress or goes bankrupt.

Why? - Because the business communities:
* Profit margins are shrinking across the service and manufacturing sectors.
* Rising unemployment creating less buying power.
* Slow to falling middle and working class real wages.
* Eroding net worth of family households.
* De-leveraging of Banks and Financial Institutions resulting in tightening of credit an impediment of organic business growth and consumer spending.

Yes, the other shoe in the banking suite of products is dropping as we speak. Because the commercial pipelines can run longer than most residential pipelines it is slower to manifest itself in the official numbers.

The Fed is conflicted because while we just had record breaking inflationary numbers this summer, it is deflation, precipitated by a World Wide slow down that we need to fear. (Refer to CRB commodity index) But that is another article.

James Monachino