THE MELTDOWN….As a nonexpert, one of the things that always astonishes me about limited financial panics is the way they almost inevitably turn into widespread panics. Bankers, those rock-jawed titans of capitalism, get scared about something or another, and once they get scared they just decide to stop loaning money to anyone. The latest example is the subprime meltdown, which has apparently caused banks not merely to panic about the subprime market, or even just the mortgage market in general, but to panic about any commercial lending. Even big, highly-rated companies are having trouble issuing corporate bonds and getting ordinary business loans at reasonable rates.
But aside from raw, adrenaline induced hysteria, why? Via Brad DeLong, Yves Smith quotes extensively from the Financial Times today to explain — sort of — what happened. Frankly, I still don’t really get it, but this seems to be the key paragraph:
[The] most pernicious problem is that it is becoming clear central banks cannot resolve the biggest problem — a lack of clarity about valuations in structured credit markets and the almost complete loss of confidence that is infecting even the biggest and most diversified of conduit-type programmes.
So the bottom line is that ordinary commercial loans have increasingly been rolled up into a variety of “structured investment vehicles,” and thanks to ripple effects from the subprime meltdown nobody has any confidence that they really know how to value SIVs anymore. So they just stop issuing them, and that in turn halts the ordinary commercial paper market in its tracks. Apparently the panic started in Europe and then quickly spread to the U.S.
At least, I think that’s the explanation here. Read the whole thing yourself for more. If you’re a high finance type and want to explain further in comments, please do. It’s still all kind of murky to me.