The joke's on you; this is from September 2000.
How the Recession Will BeginFOOL ON THE HILL: An Investment Opinion
How the Recession Will Begin
Over history, all of our great economic collapses have happened directly or indirectly as a result of too much leverage. This week {September 2000} the Office of the Comptroller of the Currency issued a report saying that troubled corporate debt to the largest U.S. banks has grown to $100 billion, or 5.2% of their total loan portfolio, up from 2.5% two years ago. This rise in high-risk debt, in a time of huge economic expansion, is an ideal catalyst for a rapid and violent descent into recession.
By Bill Mann (TMF Otter)
September 22, 2000
OK, I don't know when the good times come to a stop, but I know HOW they do. I'm spending some time running through the Annual Report of the Office of the Comptroller of the Currency (mercifully abbreviated as OCC) on the lending practices of the largest American banks. Simply put, in spite of the tightened Federal interest rates, the quality of the corporate and personal debt portfolios, according to the findings of the OCC, has grossly deteriorated. On the commercial side, $100 billion in commercial debt, out of $1.9 trillion, is now considered "troubled."
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Don't think it can happen? Every single recession in this century has had at its roots the tendency of people and companies to leverage themselves too heavily. In 1929, it was margin debt; in the 1980s, it was a slew of bad real estate and commercial loans; in 1997, it was the Thai Baht that triggered a global economic crisis. If the economy slows down quickly, the number and value of troubled loans could dramatically increase, with more of them falling from "troubled" to "defaulted."
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As such, we have a situation where large swaths of the commercial and individual debtholders are overleveraged. In the past, consumer loans were thought to be a good hedge against commercial downturns, since the banks could loosen consumer debt standards to weather short-term problems on the commercial side. But not now. Banks have no place to go but to write more risky loans. And with mortgage debt now taking up a full 77% of total consumer debt, in an economic slowdown, that last source of cash for many will not be available.
This is all to say that you should be very, very careful. Debt implosions come very quickly, as a few defaults at overextended institutions can expand very quickly. The only direct tool the government has, interest rates, takes considerable time to flow through to make a difference in the overall loan mix. The bully pulpit, which Alan Greenspan has used to some success, helps, but when banks bow to investor pressure and sacrifice long-term fiscal prudence for short-term growth, then we're dancing with fire.
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Be very careful out there, dear Fool. Because, just as only you can prevent forest fires, only you can prevent a credit crunch. How 'bout keeping that credit card holstered -- as a service not only to yourself, but to us all.
Fiat Fool!
Bill Mann, TMFOtter on the Fool Discussion Boards
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