The term “credit crunch” is very misleading for the current crisis. It suggests that the problem is merely one of confidence, that calm will return if liquidity is introduced to the system. My view, though, is that the real issue is one of solvency. This is the systemic bankruptcy of 2008. Mortgages are just the beginning. At real rates of interest, with real expectations of a reasonable rate of return, many of the deals which have been done since 2003 just do not make economic sense. Thus far, the spotlight has been on one piece of that problem - bad mortgage loans - but I think we’ll see the problem areas expanding rapidly to include a lot of the private equity deals which were done on the basis of free money between 2003-2007. I remember a fatuous statement by some private equity genius that “everybody’s rushing to do the...
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