Now it Begins to Unravel
Debt is good; more debt is better. Debt must always grow, and for that purpose, the Fed has manipulated interest rates to rock bottom. At the institutional level, the word ‘debt’ is replaced with the more politically correct ‘leverage.’ Derivatives are part of the institutional equation.
Credit bubbles unravel to the great surprise of institutions and economists. On the way up, lots of money can be made. Then there’s the peak, marked by totally crazy lending—and we’ve seen that peak. One sign: online peer-to-peer lenders for risky consumer loans, which is expensive debt. When it begins to unravel, everyone turns a blind eye. However, Bloomberg has reported that a slew of subprime consumer-loan backed securities, issued last year, are already going bad.
Given the amount of central-bank liquidity sloshing through the system, the unraveling of the credit bubble will likely be a slow, drawn-out process starting in pockets here and there.