Tuesday, June 8, 2010

Shorting the Future

Two observations that got my attention recently. The first is from The Economist:
Banks have also reduced the maturity profile of their own borrowing, rather than paying higher rates for safer longer-term funds. When all banks make the same decision this is a form of collective madness because it makes the system vulnerable to market disruptions. Moody’s, a ratings agency, notes that the average lifespan of new bank debt has fallen to its lowest level in at least 30 years.
The second is from Jeffrey Sachs:
The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.
With the banks not willing or able to support long term lending (vital for businesses seeking to invest in capital equipment if they are to exploit any recovery in demand), it looks like we're going to have to get used to the downward adjustment in our standard of living for some time to come. Feels like the year 2000 all over again...

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