[OPE] Robert J. Samuelson on "deleveraging" as a process

Money flows into developing countries have collapsed. In 2009, they may be down 82 percent from 2007, forecasts the Institute of International Finance http://www.iif.com/. Companies in these countries (Brazil, India and others) have $100 billion of maturing debts in the first half of 2009. The IIF worries that much of this debt won't be refinanced. Scarce credit spreads the global slump.

So, we've gone from too much credit to too little. Contrary to popular wisdom, banks -- institutions that take deposits -- aren't the main problem. In December, total U.S. bank credit stood at $9.95 trillion, up 8 percent from a year earlier, reports the Federal Reserve. Business, consumer and real estate loans all increased. True, lending was down 4.7 percent from the monthly peak in October. But considering there's a recession, when people borrow less and banks toughen lending standards, the drop hasn't been disastrous.

The real collapse has occurred in securities markets. Since the 1980s, many debts (mortgages, credit card debts) have been "securitized" into bonds and sold to investors -- pension funds, mutual funds, banks and others. Here, credit flows have vaporized, reports Thomson Financial. In 2007, securitized auto loans totaled $73 billion; in 2008, they were $36 billion. In 2007, securitized commercial mortgages for office buildings and other projects totaled $246 billion; in 2008, $16 billion. These declines were typical.

Given the previous lax mortgage lending, some retrenchment was inevitable. But what started as a reasonable reaction to the housing bubble has become a broad rejection of securitized lending. Terrified creditors prefer to buy "safe" U.S. Treasury securities. The low rates on Treasuries (0.5 percent on one-year bills) measure this risk aversion.

Somehow, the void left by shrinking securitization must be filled. There are three possibilities: (a) securitization revives spontaneously -- investors again buy bonds backed by mortgages and other loans; (b) commercial banks or other financial institutions replace securitization by expanding their lending; or (c) the government substitutes its lending for private lending. Until now, it's been mostly (c). http://www.washingtonpost.com/wp-dyn/content/article/2009/02/08/AR2009020801707.html?hpid=opinionsbox1

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Received on Mon Feb 9 14:18:44 2009