Financial Times has a nice op-ed that discusses how despite liquidity injections from the central banks, commercial banks still can’t manage to straighten their mess out. (the full article was available earlier, but now requires free registration to be read in its entirety)

The combined central bank injection of liquidity last week was impressive. Still, more than five months after the interbank market froze, banks’ thirst for cash seems unquenchable. The central banks have done everything they can to keep financial markets orderly. They took the risk of feeding the moral hazard beast and what did they achieve? So far they have avoided the much-feared “Big Crunch”, but the end of the tunnel is not yet in sight. The time has come to ask the harder question: do commercial banks get it?

What are they drinking? We have an idea.

Obviously, shareholders do not like the dilution of their stakes, but this is what shareholding is all about. If a company has suffered, or is about to suffer, heavy losses, its shareholders will have to bear part of the trouble. Delaying tactics prolong the misery without solving the problem, which will not go away.

Shareholders have no problem enjoying immense profits during good times. It’s nice to see someone point out how delay tactics have no real effect in solving the problems. We’ve heard many delay tactics proposed for the mortgage markets such as bailouts and temporary rate freezes, but ultimately they have no effect on solving the problem.

Credit, Financial Market, Kool-Aid | No Comments »

The Motley Fool has a lengthy but excellent article showing us where the future of the US economy may be headed.

Despite a number of hiccups this year, the stock market is still just a rock’s throw from another all-time high.

But we’re coming up on a bend in the yellow brick road, and going ’round it could cause the party lights to go dark quickly. That could change everything about the way we and future Americans live. Sound scary? It is.

What now? Many of us would like to believe Uncle Bernanke will bail us out by slashing interest rates and bringing back the good old days. Right?

Kind of — and that’s where the massive economic debacle begins, my friends. Those same spend-happy consumers raised in the go-go 1990s — they’re still alive and kicking, and you better believe they still love to spend.

Despite some of the negative news we’ve been hearing about for the past few months with regards to banks writing off losses, real estate values going down, and a slowdown in economic activity, it appears that consumers still continue to spend. A visit to your nearest mall or retail shopping center, even before the ‘holiday spending season,’ would provide some evidence to support this. It’s still very early in the cycle for most people to see what is going on, but in the coming months and years there will be plenty of statistical data to paint a clearer picture of what is really happening.

I think you can see the predicament we face: One part of our economy demands lower interest rates to bail out the housing debacle, and foreign investors who finance our massive spending habits demand higher interest rates to forestall the dollar’s demise.

What’s a central banker to do?

Special thanks to Scott S. for bringing this article to our attention

Credit, Kool-Aid, Economy | 1 Comment »

This was seen last Friday on Yahoo, but it’s too good to pass up. Recently compiled statistics show that consumer borrowing, specifically credit card use, increased significantly.

Credit card debt has been surging in recent months as consumers have started borrowing more heavily on their credit cards now that home refinancings have slowed. That slowdown has reflected tighter bank lending conditions as a serious slump in housing has sent home prices falling and increased the level of mortgage defaults.

The Home Equity ATM used by many has been tapped dry now that real estate values are going down and lending standards have tightened, so consumers are turning to the plastic. Good thing for credit cards! They’ll help keep the holiday spending train rolling.

Credit, Economy | 1 Comment »