The Emerald Tower

Credit Crisis 101 - Re-Powering America by Getting Capital Investments Flowing Again

See Also Part 1, Part 2

This is the third part of a three part series on how the credit crisis started, where it has left us, and how we can start re-powering our economy starting today.

Companies Remain out in the Cold with respect to Credit

While inter-bank lending rates are finally starting to thaw following the central banks nearly $4trln liquidity injection over the past two weeks, the credit markets continue to remain out in the cold.

The auto sector is clearly on the front lines of the credit crisis with GM now effectively borrowing 5yr money at a whopping 48% per year. This rate of interest is implying that the markets expect GM to default on its debts inside of two years if things remain as they are.

The energy sector, which is the third largest consumer of capital after the banks and the federal government, is also under a great deal of strain from the lack of funding available in the credit markets. Higher borrowing costs, lower energy price expectations, short-term demand uncertainties, and tumbling stock valuations have forced the energy sector as a whole to hold more cash and dramatically reduce the amount of capital available for future investments.

Examples of how this is playing out in the energy sector are as follows:

Priming the Credit Pump

Indeed, while the governments’ action to protect consumer deposits has helped slow the de-leveraging process by the banks somewhat, this loosening of borrowing standards is unlikely to benefit corporate or other borrowers anytime soon. The shift currently taking place from super easy to super tight credit is now sending shockwaves through the system. These shockwaves are already starting to have a severe impact on the US economy in terms of job growth, lower expected tax revenues, and reduced energy security as America gets further behind on its domestic energy investments. And things are only expected to get worse if nothing is done to get the credit pump primed once again and soon.

Vernon davis

Congress is currently working on a second stimulus package which will hopefully help provide some fresh capital into the markets but as I mentioned in my last post See Part 2, Japan spent nearly $1trln on economic stimulus packages over ten years and it did very little good to reverse the effects of their credit crisis due to its lack of focus. I am not arguing that economic stimulus packages can’t effectively be used to build bridges, but I would caution that we need to make sure those bridges are built to take us to a place to where we actually want to go.

What we need is a way to direct committed capital to industries starting today that can create jobs and give us back our competitive edge as a global technology innovator. This must not simply be a public initiative but one done in concert with private capital, understanding the banks will need to have cash flows or collateral on the table that can justify their capital commitments at a reasonable rate of interest.

This new program that I am referring is one that would establish tradable limits on total carbon emissions, investing some of the resulting proceeds into a new energy economy during the early years before returning the bulk of these revenues from the carbon market back to households. This program, known as “cap, invest, and dividend”, w

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This entry was posted on Monday, October 27th, 2008 at 8:45 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.