Credit Expansion Ends, Leads to Falling House Prices

What do we have to reckon with today?

Well, we begin with two stories.

“US credit drying up, raising fear of recession,” reports the front page of the International Herald Tribune. “Financial arteries constrict at fastest pace ever recorded.”

This is a story of a credit contraction – a piece of the big story we’ve been following for the last few weeks.

Do you remember the rule, dear reader? The force of a correction is equal and opposite to the delusion that preceded it. What would you expect to follow the biggest credit expansion of all time? Something pretty dramatic.

“Credit flowing to American companies is drying up at a pace not seen in decades,” continues the report, “threatening the creation of new jobs and the expansion of businesses, while intensifying worries that the economy may be headed for a recession.

“The combined value of two major sources of credit – outstanding commercial and industrial bank loans, and short-term loans known as commercial paper – peaked at about US$3.3 trillion in August… By mid-November, such credit was down to US$3 trillion, a drop of nearly 9%. Not since the Fed began tracking such numbers in 1973 have these arteries of finance constricted so rapidly. …”

“This is a very big deal,” said Andrew Tilton, a senior economist at Goldman Sachs (NYSE:GS).

Yes, dear reader…this is the immoveable object the Fed is up against. It is deflation. And it is a very big deal.
Bankruptcies are running 35% ahead of last year. Foreclosures were up 94% in October, from a year ago. Sears reported its profits had plunged 99% (NASDAQ:SHLD).

Meanwhile, on the other bank of the great Atlantic, the Financial Times offers this:

“New fears for housing in credit collapse.”

Ah yes, that word – collapse – is back. We hadn’t seen it for years. Just this past summer we gave a speech in Canada, regretting the ‘collapse of collapse’ – meaning, that whenever anything in the financial world threatened to collapse, the financial authorities rushed in to prop it up. Humpty Dumpty could fall off the wall all he wanted; there was always someone there to catch him.

And then, the financial authorities let him slip through their hands.

In England, as in America, the story is virtually identical.

“Banks struggle to find money for mortgages,” continues the FT report. The banks are willing to lend. But they have to borrow too in order to get the money. And three-month inter-bank rates – what banks pay when they borrow from each other – have risen to 6.59%. Banks typically borrow short and lend long. But when short rates are so high, how can they make any money lending for long-term mortgages? They can’t. So they stop lending. And without ready mortgage credit, buyers stop buying houses. And when buyers stop buying houses, house prices fall…and all of a sudden a lot of people are in trouble.

“The first concrete sign of a crunch in credit availability is likely to emerge today when Bank figures are expected to show a large fall in mortgage approvals for October. “

Oh well…something that had to happen sooner or later is bound to happen one day. The credit expansion couldn’t go on forever, after all. Why not today?

No milestones this week. In fact, instead of hitting the US$850 mark, gold fell below US$800. The yellow metal is in a bull market. But bull markets have corrections. Maybe this is just wishful thinking, but gold could easily fall below US$700 before resuming its march to US$1,000.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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