NCPA - National Center for Policy Analysis


December 9, 2008

There have been more than a dozen financial crises since the end of World War II, after which markets rebounded quickly.   However, the current crisis will be different; it will usher in profound and lasting structural, behavioral and regulatory changes, says Henry Kaufman, president of Henry Kaufman & Company, Inc., and author of "On Money and Markets: A Wall Street Memoir."

Today, more than half of all nonfinancial debt is held by the top 15 institutions, which are the very same firms that played a central role in creating an unprecedented amount of debt by securitization, complex new credit instruments and pushed for legal structures that made many aspects of the financial markets opaque.  In the years ahead, the influence of these financial conglomerates will be overwhelming, and through their global reach, these firms will transmit financial contagion even more quickly than it spread in the current credit crisis, says Kaufman:

  • We will see the end of an era of ballooning nonfinancial debt, but with the techniques and institutions that generated the tidal wave of debt creation now are in disarray.
  • Already we are seeing a dramatic slowdown in rate of growth of household and business debt, a trend that will continue for some time.
  • U.S. government borrowing will continue to swell, at least for a few years.
  • New net U.S. government debt issuance could exceed $1 trillion per year -- as federal revenues slow, spending increases, and funds are needed to rescue additional financial institutions.

Yet, there is a silver lining: the combination of shrinking private sector demands and expanding federal demands will improve the credit quality of many portfolios.  But the central question will be whether policy makers can define and implement a strategy that will slow government borrowing as private-sector credit demands reassert themselves in the medium term, says Kaufman.

Source: Henry Kaufman, "How the Credit Crisis Will Change the Way America Does Business," Wall Street Journal, December 6-7, 2008.

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