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Credit Crisis Phase II - The Economic Crunch

Economics / Credit Crisis 2008 Sep 06, 2008 - 02:02 AM GMT

By: Nadeem_Walayat

Economics Best Financial Markets Analysis ArticleThe credit crisis having manifested itself most evidently during the past 12 months through the continuing tightening in the availability of credit to all sectors of the economy despite government and central bank actions of pumping hundreds of billions of dollars if not more than $1 trillion into the financial system so as to prevent a chain reaction of bank failures as the worlds big banks continue to announce ever larger bad debt provisions each and every quarter.


The latest economic data now confirms that the the credit crisis is having a serious impact on the major western economies all of whom are now fast tipping into recession, with the momentum of economic contraction feeding in on itself as the chain reaction of contraction in one sector impacts on to the next sector and so on cycling back around as every sector of the economy follows the financial and housing sectors into recession.

The expected tendency would be to expect the first sector to be hit hardest to be the first to recover, therefore an end to the crisis will be first seen within the financial sector, the core problems of which relate initially to the US housing market backed derivatives that magnified exposure to the market by in some cases as much as 30X the amount risked. Whilst the world enjoyed a credit boom this brought huge profitability to the banks, however derivatives being an over the counter market, i.e. without any regulated market place, the mark to market methodology deployed to boost valuations hence profits were akin to plucking figures out of thin air. This started to come to a head 12 months ago when the big banks suddenly both a) stopped trading the assets between themselves due to the dubious valuations and b) were not prepared to risk further lending to other institutions where the risks were now un quantifiable as to whether they would be repaid or not, hence the interbank credit freeze and the delveraging of the estimated $500 trillion (BIS) global derivatives market began

The US housing market is far from bottoming, my existing forecast suggests that the US housing market will not bottom until late 2010, for at least another 2 years, therefore the position of the big banks will continue to deteriorate and so will the state of the economies which will lag any bottom in the housing markets, hence this suggests at least the next 2 years will be economically tough and on par with what could be termed as a soft depression, depressions tend to be highly deflationary which is what we have been witnessing as asset prices contract literally across the board from housing to stocks and finally to commodities.

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The following articles continue to expand on the impact of the credit crisis on the worlds economies and asset prices as politicians such as Britain's Chancellor of the Exchequer Alistair Darling " Economic times are arguably the worst they've been in 60 years… I think it's going to be more profound and long-lasting than people thought ", prepare the populous for a recession.

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By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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