Monday, February 16, 2009

I Have Been Waiting

For someone to write this with backup since it was bugging me and I lacked the numbers. From Jeremy Grantham's January 2009 letter to investors, a case against the U.S. market and economy desperately needing better access to credit:

"If in real terms we assume write-downs of 50%
in U.S. equities, 35% in U.S. housing, and 35% to 40%
in commercial real estate, we will have had a total loss
of about $20 trillion of perceived wealth from a peak
total of about $50 trillion. This relates to a GDP of about
$13 trillion, the annual value of all U.S. produced goods
and services. These write-downs not only mean that
we perceive ourselves as shockingly poorer, they also
dramatically increase our real debt ratios. Prudent debt
issuance is based on two factors: income and collateral.
Like a good old-fashioned mortgage issuer, we want the
debt we issue to be no more than 80% of the conservative
asset value, and lower would be better. We also want
the income of the borrower to be sufficient to pay the
interest with a safety margin and, ideally, to be enough to
amortize the principal slowly. On this basis, the National
Private Asset Base (to coin a phrase) of $50 trillion
supported about $25 trillion of private debt, corporate
and individual. Given that almost half of us have small
or no mortgages, this 50% ratio seems dangerously high.
But now the asset values have fallen back to $30 trillion,
whereas the debt remains at $25 trillion, give or take the
miserly $1 trillion we have written down so far. If we
would like the same asset coverage of 50% that we had a
year ago, we could support only $15 trillion or so of total

Without a doubt, there are some very worthy borrowers who are struggling to find a loan. As banks' assets have declined in value, they have been hustling to keep leverage and capital ratios in line. Without a doubt, it is more difficult overall than it was 2 years ago to get a loan. It should be. I don't want to see another bank fail in dramatic fashion, or even quietly, but it may result in the worst case scenario if we incent them to go back to their old lending levels.

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