"...an individual who undertakes to live by borrowing, soon finds his original means devoured by interest, and next no one left to borrow from..." Abraham Lincoln (1809-1865)
An article in this week's The Economist, "A good time for a squeeze," suggests tighter credit conditions are just what the markets need. Of course, no one can predict the ultimate consequences of what I have referred to as "the cycle of greed" but the financial markets are certainly "repricing risk" as liquidity fuel is running out and credit capacity diminishes. Here are some key excerpts from the piece:
The impact on debt markets themselves will be big. As standards are tightened, many of the reckless practices that have become the norm in corporate lending will be abandoned...
Across the rich world, firms are flush with cash. Their profits have been fat for the past five years and, on average, companies have been funding their capital spending from their own resources...
...most emerging markets are in far better shape than they were during the financial crises of the late 1990s. They have restructured their borrowing and often built up vast coffers of foreign-exchange reserves...
A credit squeeze will aggravate the housing bust and falling house prices could drag down further. But the rest of the world is growing strongly and unemployment in America remains low, so a recession is by no means inevitable...
For all the hand-wringing about hedge funds and complicated derivatives, the real worry comes from a well-known source -- the banks... Many banks have already agreed to underwrite deals and are finding that they cannot sell the debt on to investors... Some banks may have as-yet-undisclosed losses on their own accounts... If banks profits collapsed, they would become more reluctant to lend... Yet although banks are the biggest worry, their balance sheets look fairly solid...
So far, though, the financial wobbles, however unnerving, look like healthy repricing of risk. Markets, much like people, sometimes need a good squeeze...
As the cycle of greed has moved from the original "lavish desires" of consumers to the capitalization of that weakness by sub-prime lenders to the re-packaging of the loans into "investments," which then allowed hedge fund managers to "sell greed" to investors looking for higher returns, we now will watch as the cycle unwinds itself.
How great will the impact ultimately be on all of the many participants of greed? No one can answer that question until it is a piece of history. Can greed ever really be contained? As 5000 years of wisdom will attest, the answer to that question would be a definite, "no." It will simply fade and return in some other form...
The wise questions are for a financial philosopher: Have you allowed greed to lead personal finance or investment decisions or have you leveraged the greed of others for your own personal gain?
You may rest assured I will be in perpetual pursuit of the knowledge to answer our questions and share them and any observations I will have made along the way...
TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.
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