Oiling the Wheels

"Heading for a credit crunch" is one of those sayings that I find very strange. It gives the impression of financial institutions driving towards each other at high speed and we, the markets, tax payers and politicians, must leap in at the last second to stop them destroying each other, blowing up and ruining all our lives. What is ultimately frustrating about the crunch is that it arises from a basic business premise - risk vs reward. The institutions involved are bad risks with low rewards, and hence sensible businesses do not invest in them.

So, like some short term amnesiac, we are back to like we were a couple of years ago where everyone gripped tight to their dollars and those without them suddenly found they were unable to conduct their daily business. This time though the FED and Central banks dipped into their pockets early in an attempt to avoid the banks slipping under. By now everyone understands, or should know, that many institutions are tied up to their rivals and so when one slips under then multiple follow suit. The additional liquidity buoyed the market and the exchanges, although it will only be a short term resolution as the problem isn't the credit, the problem is bad risk. 

 

More on the liquidity issue -

The Guardian

Yahoo