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The Credit Crunch Explained

The Credit Crunch Explained

    Yesterday I asked for links to any articles explaining how bad things could get if the $700 billion bailout doesn’t happen. The best one I saw was this:


    I like the clarity of that explanation, but it seems incomplete. For one thing, there is no discussion of the positive aspects of a financial calamity, for example:

    – Rent gets cheaper when housing prices fall. That’s a redistribution of wealth from the rich to the poor.

    – While it will be harder to get a mortgage for an $800K house, that house is only worth $500K now. That should make it a lot easier to qualify.

    – Gas at $4 per gallon is a necessary condition for creating the next economic boom: renewable energy and green technology.

    – A good recession now and then is necessary to purge the economy of things that need purging.

    – College students are starting to choose technology majors over finance majors, probably because of the financial headlines, and this bodes well for the future.

    I also wonder if the Internet will take some of the steam out of a credit problem. The problem is a lack of credit, not a lack of people who want to borrow, or a lack of money to lend. When lending is constrained by geography, you might find that your local bank is unwilling to help you. But with the Internet, it seems we could always find a match between a lender and a borrower, at some interest rate. The people who have money to lend aren’t going to be keen on the stock market or real estate for awhile, so there should be plenty of capital for private lending at attractive rates. Arguably, banks are an anachronism anyway. This might speed up the inevitable.

    I own some real estate (an empty lot) I have been trying to sell. Every recent offer on the property has included a component of seller financing. I expect to see a lot more of that if bank lending dries up.

    And allow me to leave you with a pinch of optimism, just because I can. I call it Adams’ Rule of Obvious Calamities. It states that any calamity that is foreseeable by the public at large won’t turn out so bad after all. The best recent example was the Y2K problem, where computers worldwide were expected to fail. It seemed impossible that those issues could be resolved in time, but they were.

    The problems that hit hardest are the ones that sneak up on you. Our current financial problem is big, but I expect a recession to be mild and even useful, precisely because so much human energy and attention is being focused on the fix.

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