Accrued Interest has a sober take on the "crisis" meme:
Are there large numbers of insolvent consumers? Sure. Is it going to create a pretty big problem for the economy generally. Yes. Recession? Maybe, just depends on what else goes right or wrong for the economy. Crisis?
I have a hard time with the word crisis here. Maybe I’m hung up on mere semantics. In my mind, a marriage in crisis is one where divorce is an imminent possibility. Not one where the couple just had a big ugly fight. A political crisis is one where the government might collapse. Not where an election is peacefully contested in the courts. To me, that word "crisis" suggests that action must be taken to avert some sort of disaster…
What we have are people who speculated in houses and lost. We have banks who lent to the aforementioned speculators and have lost too. Bear in mind, these banks are the ones who agreed to limited documentation of income (perhaps so the speculator could claim this would be his/her primary residence?) or minimal down payments.
What we also have are brokerage firms who warehoused bonds backed by these speculation loans, assuming they’d be able to unload them into a CDO. They’ve lost too. We have banks buying AAA-rated CDO^2, who never asked why CDO^2 spreads were so much wider than other AAA product. Guess what? They’ve lost too. We have money markets buying securities they didn’t understand. Losers. We have hedge funds who took already leveraged CDO and ABS product, and leveraged it some more! Loo–oo–oooooooser!
All this isn’t a crisis. Its how the credit cycle works. When credit becomes too easy, bad loans get made. People get hurt. But that’s the way of the world. You move on.
Unfortunately, no one seems to have told the financial press that we’re not in a crisis. Financial News reports:
The Financial News family of indexes measures references to collapse, crisis, fraud and scandal in articles in Financial News and on Financial News Online each year. To create each index, the frequency of mentions is rebased to 100 starting in 1998 to reflect the three-and-a-half fold increase in the number of articles published by Financial News in the past decade.
Last year, the word “crisis” appeared in 692 articles, an increase of more than five times over the previous year. The Crisis Index leapt from 25.5 to 100.8, overtaking for the first time the base of 100 in 1998, the year of the Russian crisis and the collapse of hedge fund Long-Term Capital Management.
The Russian crisis was a crisis, as was LTCM: both had very nasty global systemic implications. What we saw in 2007 was not a crisis. Will there be an actual crisis in 2008? No one knows. But you can be sure that there will be a lot of talk of one, either way.