Is the banking and credit crisis getting worse or better?

Although there continues to be a continuous stream of bad news about the banking and credit crisis, that per se is not an indicator about whether the financial system is traveling deeper into the woods or in fact is past the midpoint and closer to resolution than to where it started. I believe it is the latter. A significant number of the recent stories have been about writedowns, pulling SIVs onto balance sheets, buying assets from cash management pools, infusions of capital into banks, replacement of financial executives, actions by central banks, etc. All of these are signs of progress towards resolution rather than signs of further decay. Sure, there is still plenty of talk about bigger writedowns coming, but that is a side effect of an increase in information flow leading to more accurate asset pricing, which is progress, not an unravelling.

Just this week we had several stories about Warren Buffett jumping into the fray and buying up assets and even starting up a new bond insurance business. These are all signs of improvement, not further decay.

Sure, we have a large overhang of mortgage resets looming, but they will be more of an incrementally rising tide rather than a swift and overwhelming wave, so that will give market participants time to adjust and reprice mortgages and terms as the magnitude of the actual foreclosure problems incrementally unfolds. Don't forget, markets have been seeing a rising tide of mortgage resets for over a year now. There are more than enough plans and schemes being discussed, especially since a major election season is looming, so that it is virtually impossible to imagine that any number of fixes won't be put in place over the coming two years.

Also bear in mind that after dealing with the immediate and intense pain of a foreclosure, the prolonged period of anxiety of the pending foreclosure (and its impact on personal spending) gets fairly quickly replaced by a sense of relief and a resumption of spending as the houshold decamps to more affordable housing and "starts over." Yes, the pain of a foreclosure is quite unbearable, but it is what happens after that which impacts the overall economy.

Finally, bear in mind that there are two distinct banking issues in this "crisis": liquidity and credit. The Federal Reserve is doing a reasonable job of assuring that the banking system has enough liquidity to clear short-term banking transactions. That was a "crisis" back in August for a few days, but is now more of an ongoing adjustment process than a true "crisis." Credit is not a problem per se since that are still vast amounts of cash sloshing around the world in any number of markets, but there are niches of credit that will continue to go through an adjustment process to align asset pricing with reality and to assure that financial institutions are adequately capitalized. As we have seen with recent cash infusions, it is mostly a matter of time and pricing rather than a lack of overall credit availability around the world.

In short, virtually everywhere I look I see improvements or at least opportunities for improvements in the so-called banking and credit "crisis."

-- Jack Krupansky