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Author Topic: How bad will the credit crunch get?  (Read 890 times)
Pete Dimano
Getbig III
Posts: 716

« on: August 03, 2007, 05:32:19 AM »

How far will the credit crunch spread?
There's no doubt that financial markets have felt the pain of the credit mess, but it hasn't yet hit the consumer economy. Here is what I see ahead.

The financial markets are right to be worried about the potential for a credit crunch.

In a credit crunch, lenders stop lending and credit becomes tough to obtain. A credit crunch can bring down everything from weak, deeply indebted companies to overextended lenders to over-leveraged borrowers to an economy as a whole.

So the question is: Are we in the midst of a credit crunch?

In the market for mortgage-backed bonds, leveraged-buyout loans and high-yield, or junk, bonds, yes, the crunch is upon us. The absolute paucity of buyers for those classes of assets -- what I described as a buyers strike in my July 31 column, "Stocks feel the pain of a buyers strike" -- has led lenders to cut way back on putting their capital at risk in leveraged loans or junk bonds. In these markets, not only have prices collapsed, but deals are being scrapped because of a lack of new credit.

But in the general economy where consumers live and spend, the credit crunch hasn't yet materialized.

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