The Fed’s tightening is hitting the markets. It has sent bond prices plunging and yields soaring. And it has stopped the bull market in stocks in its tracks. Is it also beginning to show up in banking indicators? Well, maybe not yet, but that’s no reason to be complacent. Bankers and borrowers are often the last to get the news and feel the pinch.
First, let’s consider just how dangerous the current situation is. We know in retrospect, and some of us were well aware at the time, that there was a raging credit bubble in the 2004-07 period. If that was a bubble, what’s today? I’ll let you be the judge. Here’s a chart of total bank loans through early May.
I got an interesting comment the other day on one of my columns on Money Morning, and it really points up a recurring misunderstanding that I see about the economy and the markets. So with apologies to Jon, I’m going to use him as a quick object lesson this weekend. (Thanks for commenting, by the way!)
Jon: The author, in my opinion, is off base. Consider that interest rates were manipulated by the Federal Reserve and their counterparts around the world, for what reason? The answer was to stimulate the world economies because at that time we had excess manufacturing capacity worldwide.
To a lesser extent we still have excess capacity but less so than 10 years ago. The Fed has not lost control but it will be tricky to balance the inflationary forces against lessened overcapacity to normalize rates and shrink its balance sheet.
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