Comments on: Do You Want to Know a Secret? http://www.creativeclass.com/_v3/creative_class/2009/07/02/do-you-want-to-know-a-secret/ The source on how we live, work and play Wed, 07 Dec 2011 18:10:07 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: David Shumaker http://www.creativeclass.com/_v3/creative_class/2009/07/02/do-you-want-to-know-a-secret/comment-page-1/#comment-13262 David Shumaker Fri, 03 Jul 2009 02:10:48 +0000 http://www.creativeclass.com/_v3/creative_class/?p=12120#comment-13262 Not a secret so much as not mainstream thought, but you make a good point. Karl Denninger has been onto this for years. Here's what he says about this recession being a credit-driven recession a la the Great Depression: "The types of recessions are inventory driven recessions, the most common, and credit driven recessions. The last material credit driven recession was in the 1930s. We called it the 'The Great Depression.' Inventory-driven recessions are primarily about excessive industrial capacity for demand. That is, manufacturers and suppliers of services get too bullish about prospects, build too much capacity and inventory, and wind up engaging in a destructive price war in an attempt to 'win'. This drives down profits and ultimately forces the weaker firms out of business, ergo, recession - GDP and employment decline. Having cleansed itself of the excess, the economy recovers. The trigger for these recessions is often (but not always) an external shock such as the oil embargo in the 1970s or the collapse of the Internet fraud-and-circuses games in 2000. The second sort of recession is a credit-driven recession. Excessive credit creation - that is, loans going too far toward 'fog a mirror' qualifications (and in some cases, such as the most recent event, actually reaching 'fog a mirror') drives one or more asset bubbles. These pop when effective interest rates in the economy reach an effective level of zero, usually because the amount of leverage available becomes for all intents and purposes infinite (Bear and Lehman at 30:1, Fannie/Freddie at 80:1, AIG at god-knows-what, and duped "home buyers" buying with zero down for a true infinite leverage ratio.) This excessive credit creation drives a speculative asset bidding war which in turn causes prices to go sky-high for one or more types of asset." http://market-ticker.org/archives/1175-To-Dennis-Kneale-Youre-An-Idiot.html With asset bubbles, the banks making loans against bubblicious assets, or that own bubblicious assets like mortgage-backed securities, get wiped out when the credit contraction that follows deflates the value of those assets, making them insolvent. Insolvent, that is, without scandalouly high leverage ratios hidden by bailouts that pump up assets in an effort to reduce leverage. Not a secret so much as not mainstream thought, but you make a good point. Karl Denninger has been onto this for years. Here’s what he says about this recession being a credit-driven recession a la the Great Depression:

“The types of recessions are inventory driven recessions, the most common, and credit driven recessions.

The last material credit driven recession was in the 1930s. We called it the ‘The Great Depression.’

Inventory-driven recessions are primarily about excessive industrial capacity for demand. That is, manufacturers and suppliers of services get too bullish about prospects, build too much capacity and inventory, and wind up engaging in a destructive price war in an attempt to ‘win’. This drives down profits and ultimately forces the weaker firms out of business, ergo, recession – GDP and employment decline. Having cleansed itself of the excess, the economy recovers. The trigger for these recessions is often (but not always) an external shock such as the oil embargo in the 1970s or the collapse of the Internet fraud-and-circuses games in 2000.

The second sort of recession is a credit-driven recession. Excessive credit creation – that is, loans going too far toward ‘fog a mirror’ qualifications (and in some cases, such as the most recent event, actually reaching ‘fog a mirror’) drives one or more asset bubbles. These pop when effective interest rates in the economy reach an effective level of zero, usually because the amount of leverage available becomes for all intents and purposes infinite (Bear and Lehman at 30:1, Fannie/Freddie at 80:1, AIG at god-knows-what, and duped “home buyers” buying with zero down for a true infinite leverage ratio.) This excessive credit creation drives a speculative asset bidding war which in turn causes prices to go sky-high for one or more types of asset.”

http://market-ticker.org/archives/1175-To-Dennis-Kneale-Youre-An-Idiot.html

With asset bubbles, the banks making loans against bubblicious assets, or that own bubblicious assets like mortgage-backed securities, get wiped out when the credit contraction that follows deflates the value of those assets, making them insolvent. Insolvent, that is, without scandalouly high leverage ratios hidden by bailouts that pump up assets in an effort to reduce leverage.

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