Naked Lenders

I’ve expressed confidence that the economy is recovering and that we’ll do well over the next couple of years; all with it being obvious by June of next year. I think I’d like to point out my concern with my own projections – the most likely reason I am wrong.

It boils down to the fact this was a credit driven as opposed to inventory driven collapse. Basically, the money supply froze – critical money movers suddenly felt nearly naked and weren’t willing to further expose themselves. Yes, housing started the unraveling, but it was symptomatic of the whole industry.

The problem is that these naked movers haven’t covered themselves. Oh, they’re moving a bit, again, but it’s with great caution – and they’re still naked (though not quite as much as they were a couple of years ago.)

Now I happen to believe the reason things are moving and the recovery is happening is that these movers are more comfortable with the status quo. Things didn’t get better, the companies and their decision makers got more comfortable with where things were. That works, short term.

It still leaves us vulnerable to another credit freeze.

I think we have between two and five years to get the problem covered. There are tentative moves in that regard already in progress, and a lot of resistance from those who stand to make money from the over-extensions. But sooner or later we’re going to have some sort of bubble pop or appear to pop, and when it happens everyone is again going to notice how… naked the lenders are. That is, UNLESS we get it fixed.

There are some pieces of legislation in progress. In addition the Fed is trying to demonstrate it can do the job it sort of had responsibility to do but didn’t do before. These may, between them be enough — IF they are concluded instead of being dropped, and if they’re not rendered toothless. My confidence in that happening is … it looks like we’re going to get something but I can’t decide yet whether it’s going to be enough.

Still, the fact that there are actions in progress right now contribute to may comfort in thinking this won’t be a problem for the upcoming year. A credit freeze won’t happen – or at worst it won’t be severe enough to stop the recovery stillborn.

It’s a worry, but not an immediate worry.

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