The world is starved for credit.
I know it doesn’t seem that way what with huge stimulus packages in 2009, massive expansion of the money supply in the United States, China, and Europe, and hand-over-fist expansion of the balance sheets at the U.S. Federal Reserve and the European Central Bank.
But all that may not be enough to make up for the trillions in credit that the market for securitized debt supplied every year—until the 2007 financial crisis. That’s what Gillian Tett argues in a must-read column in today’s (June 24) Financial Times.
Here are the numbers behind Tett’s argument.
From 2000 to mid-2007 the market for securitized debt (that’s debt such as mortgages or credit card receivables that’s been pooled, repackaged, and then sold by the originators of the debt to investors looking for cash flow and income so that the originating institutions can recoup their cash and lend it ouit again) grew like Topsy. By mid-2007 the volume of securitized debt had grown to $8 trillion, according to Citigroup. The markets for securitized debt accounted for more than half of all credit created in some sectors. (Housing would be one obvious example.)
Since then these markets have collapsed. Last year only $4 billion in one form of securitized debt—collateralized debt obligations (CDOs)—were sold in comparison to $520 billion in 2006. So far this year sales of securitized debt in Europe add up to $37 billion. Before the crisis annual sales were more than $750 billion.
Tett points out that central banks have stepped into void to replace the securitized debt markets. For example, the U.S. Federal Reserve has bought $1.25 trillion in mortgage-backed debt securities. The European Central Bank has been just as active. Before the financial crisis, Euro Zone banks sold 95% of their securitized debt to investors. Right now those private markets account for less than 5% of securitized debt sales.
For me two big picture questions emerge from Tett’s column.
First, is one reason for the continued weakness of the global recovery, a lack of global credit as a result of the shutdown in the markets for securitized debt?
Second, if the markets for securitized debt remain so frozen, and central banks are starting to cut back on their buying of securitized debt, aren’t we in danger of starting another global credit crunch?