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Thursday, May 14, 2009


the real credit crunch


U.S. commercial paper outstanding fell $81.1 billion to $1.298 trillion for the week ended May 13, ABCP fell to $ 598 billion.

with all the discussion of banks, it's easy to forget that commercial banks intermediated the minority share of credit creation in the boom. securitization was responsible for the majority, and it is continuing to collapse in breathtaking fashion as particularly illustrated by the fall of both financial and asset-backed commercial paper outstanding.

this is a massive suction of deleveraging pulling down our credit-based economy, amounting to $292bn since the end of october across all types. the rate of decline noticably picked up since the start of april as well, though the data is lumpy, with a $154bn reduction in april and $124bn in just the first two weeks of may.

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On the topic of deleveraging, there has been a lot of anecdotal talk about how much the financial sector has already deleveraged. Yet as of the end of Q4 2008 the aggregate numbers in the Fed flow of funds data show only household debt contracting so far (at a 2% annualized rate), with business and financial sector debt still expanding!

Do you think aggregate private sector deleveraging is much further along in the last 4 months? A $292 billion drop in commercial paper is only 0.5% of total debt outstanding, and other debt could still be expanding.

If this crisis is ultimately going to shrink private debt-to-GDP back to historically sustainable levels, that implies the real economic crisis (versus financial sector crisis) and deflation have barely even started... Yikes.

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anecdotally, many firms have been said to be drawing on prearranged revolving lines with the banks. some of that, i'm sure, is being used to refi CP and other hazardous short-term lending. so there's a picture that hangs together a bit -- corporate and (forcibly) bank debt slowly growing, capital market leverage collapsing faster, with households cutting debt.

but fwiw, i think your conclusion is right -- "barely even started". this will be a process taking years, and i imagine the pace will pick up.

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