Bill Bonner Says Get Ready for an Era of Credit Contraction
Posted on: Sep 3rd, 2008 | By Bill Bonner Bill Bonner | Filed under Politics & Economics
Daily Reckoning editor Bill Bonner is sticking to his view that the trend of the last 25 years – falling interest rates, rising stocks, stable inflation – is coming to an end. The credit expansion of that period should give way to credit contraction in the coming years. And in trying to prevent the inevitable with its bailouts, the Fed is just making matters worse…
The financial world did an about-face in the early ’80s. After a generation-long period of rising rates of interest…topped by a final squeeze delivered by Fed chairman Paul Volcker…rates were ready to come down – for another generation.
As we explained last week, our guess is that the financial world is about to spin on its heels once more. After such a long period of falling real rates of interest, they should be ready to go back up. The credit expansion of the ‘82-’07 will turn into the credit contraction of the next few years – at least, that’s our guess.
And again, the previous trend is given – unwittingly – a final push by the Fed. Currently, favored institutions – member banks of the Federal Reserve – can borrow at less than half the rate of consumer price inflation. That makes their real rate of interest NEGATIVE…about -3%.
The Fed also lends to commercial banks – which it regulates – as well as to investment banks, which it doesn’t. The investment banks are the same firms that made such a hash of the mortgage market. But the feds didn’t want to see their friends and contributors from Wall Street get what they deserved. So, they’re bailing them out – openly, as in the case of Bear Stearns…and clandestinely, as in the case of the rest of the street.
And now, everybody’s getting in line for a bailout. The feds have already practically nationalized the entire nation’s housing stock – by supporting Mae (NYSE:FNM) and Mac (NYSE:FRE). And Detroit has asked for $25 billion – again, at negative real interest rates!
Where’s the end of the line? That’s not a rhetorical question. We want to know so we can join the queue.
Source: Ineluctable Truths
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Best-selling investment author Bill Bonner is the founder and president of Agora Publishing. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning and three best-selling books, Financial Reckoning Day: Surviving The Soft Depression of the 21st Century, Empire of Debt: The Rise of an Epic Financial Crisis and Mobs, Messiahs and Markets.. 