U.S. credit shrinking

From the Telegraph:

"Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

'There has been nothing like this in the USA since the 1930s,' he said. 'The rapid destruction of money balances is madness.'

'For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,' he said.

It is unclear why the US Federal Reserve has allowed this to occur.

'The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances,' he said. 'It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010.'

been saying this all year

N Rothschild said:

been saying this all year

Click to expand...

Are you, in fact, Professor Tim Congdon ?


Paul

perhaps

Similar to my argument against the house price bulls. House prices were built on easy access to credit, then the price rises allowed everyone, especially buy-to-letters, a chance to then take equity from the credit-born rise and feed the frenzy further.

If you then remove jobs, credit, bank lending and rising prices then it has to come down. It's all make believe and built on fiat money coinfidence, which is unwinding as we speak. We can keep printing and printing but they're running out of headroom for that.

(Reuters) - The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

"That's the next round of potential foreclosures in our country," he said.

Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures.

In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal.

When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy

borrowers that fed the first wave of the financial crisis.

The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

The U.S. housing market has suffered the worst downturn since the Great Depression, and its impact has rippled through the recession-hit economy.

Some signs of stabilization emerged recently, with sales rising and home price declines moderating in many regions of the country. Home prices in some regions have risen.

However, many economists say there is still a huge supply of unsold homes lingering on the market and that, coupled with a frenzy of more foreclosures ahead, should depress home prices for the rest of 2009.