Morning Brief – Kredit Krunch

Kredit Krunch

As far as I know, the most obvious way to ironically obfuscate a two-word phrase is to swap the first letter of the two words around. With the phrase ‘credit crunch’, picking up that irony would be harder than finding the meaning in some modern art. It’s been a decade and a half since the phrase credit crunch was bandied about as everything from an analysts’ way of explaining economic conditions to a political excuse for austerity. Even so it seems far too soon to allow the phrase to be the title of this daily briefing. Unfortunately, looking at how central bankers are seeking to control the narrative at present, it seems this knock off meal-deal sounding economic paradigm could be set for an unwelcome return.

As a reminder, ‘credit crunch’ is a phrase coined to describe the unwillingness of lenders to provide credit. Consumers and businesses alike were therefore starved of capital desperately needed in order to finance a change of gear out of ensuing recessions. Despite rates remaining very low at the central bank level, it was the availability of credit, not the cost of credit, that proved to be the constraining factor. The Fed recently justified a hold in rates based upon a repricing of treasuries in the fixed income market. As the market had done some of the Fed’s job for it and made financial market conditions more restrictive in its absence, a hike to the benchmark rate was seen as unnecessary.

This divorce of control from the monetary authority to the market was welcome. But it is not dissimilar forces that allowed high street lenders to tighten their purse strings following the financial crisis. So far, this round of economic shocks has not created a financial crisis. Economic thought allows for a financial crisis to be possible but not a foregone conclusion. However, the narrative developing across central banks is concerning. Just this week, numerous central bankers have suggested that the policy outlook remains uncertain. Those same individuals have also warned about the level of household debt and the risks to credit conditions. Should we be on the path to revisiting a credit crunch, the current FX playbook would have to be ripped up and replaced with a new set of strategies.

Discussion and Analysis by Charles Porter

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