Tuesday, August 7, 2007

Ignore Credit Hysteria

Negative sentiment regarding the sub-prime meltdown and subsequent normalization of credit spreads has reached the level of outright hysteria. Even people who should know better have suddenly morphed into Chicken Littles. I am one who is always ready to point out liabilities and weaknesses in the system, sometimes accused of being negative in fact, but this has gotten out of hand. The liabilities that bite you are the ones you aren't paying attention to. This one has already done its worst.

Credit spreads have been insanely narrow for a long time, distorting capital markets and enabling many marginal deals to be done. The normalization of credit spreads is a cleansing and strengthening event. It has already washed away many marginal players and it will force greater discipline on the marketplace, creating a healthier financial environment. The transition is, and will continue to be, painful for segments of the housing and mortgage markets, and for those who have grown accustomed to easy money from various "carry trades," but this is an overall positive development that will likely extend the life of the current expansion.

Update: The August 4th Economist goes into detail why "tighter credit conditions are just what the markets need."

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