Credit Squeeze Hits Rich with Cancelled Deals, Poor with Foreclosures

The interesting news continues to come from two vastly different areas – the top and the bottom of the financial pyramid.

At the top, a small number of people are feeling the effects of credit squeeze. The people are few but the money is great. Nearly a half a trillions dollars’ worth of deals have been stuck…pushed back…or cancelled for lack of financing.

Not that the feds and the Wall Street hotshots aren’t doing all they can to make the deals flow. Bloomberg reports that the Fed ‘injected’ another US$31.25 billion into the banking system last Thursday. Still, the ‘deals, deals, deals’ at which we marvelled earlier in the year seem to be very hard to do.

“Deals Boom Fizzles as Cheap Credit Fades,” says the WSJ.

The problem is that even though the feds are making money available, lenders are becoming reluctant to lend and borrowers are becoming reluctant to borrow. That’s why we see the London Inter-Bank Lending Rate – LIBOR – so far above the central banks’ base rates. The government, through central bank intervention, can set one rate. But the banks have one of their own. And right now, banks are wary about lending a lot of money to each other – because they can’t figure out what each other’s real financial situation is.

“We ran into the problem in our hedge funds,” reported our old friend John Mauldin at dinner on Wednesday night. “The pricing mechanism for many of these investment positions broke down. No one knows exactly who owes what to whom. It will clear itself up, of course…but right now, people are a little scared.”

Meanwhile, down at the bottom of the financial pyramid the individual numbers are smaller, but the number of individuals is much greater.

Foreclosures hit another record high, says yesterday’s news. Here, too, the feds are ready to step in with more money. But lenders and borrowers have grown weary and skittish. Mortgage lenders continue to close their doors. And mortgage borrowers continue to miss payments. One in seven subprime mortgages are now in arrears.

This should reduce consumer spending…but there was no sign of it in yesterday’s news. Instead, Macy’s (NYSE:M) and Wal-Mart (NYSR:WMT) reported better-than-expected retail sales. Go figure.

While the central bankers make money available to distressed speculators, borrowers and Wall Street operators have another worry:

Yesterday, oil rose over US$75. Wheat piled up above US$8. And gold…yes…gold was up over US$700.

In a credit deflation – which is what is happening at the top and bottom – you’d expect prices to fall. And so we do expect prices on houses and financial assets, generally, to fall.

But what oil, wheat and gold are signalling is something else. They’re telling us to beware of inflation…and to watch out for the falling dollar.

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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