thevicenarian.com

A Market Bubble Collapses: The Slow Motion Train Wreck Version

Posted by T.W. Hanson - Mar 16th, 2008 at 20:03

Vicenarians don’t have much practical experience with the troughs in the business cycle. There was the savings and loan crisis in the late 80s and early 90s, but many of us were learning how to read during those years. The Internet/.com bubble collapse of 2000 is our primary frame of reference for distressful economic times. This crisis is appears very different. Although characteristics like increased unemployment seem to reappear each cycle, there are rarely perfect parallels from one downturn to another. One of the macro differences is the speed. The rate at which this credit markets are contracting is much slower than the rapid implosion of the Internet companies in 2000.

Unlike in 2000, today’s irrationally overvalued assets are homes and properties. Prices for these assets are sticky. Most are unique and take weeks, months or years to sell. One result of this is that the securities tied to the value of these properties have fallen at a similarly and painfully slow pace. Write downs of assets on bank balance sheets haven’t occurred all at one but have been stretched from quarter to quarter to quarter. This is forecast by some to continue for quarters to come.

During the Internet bubble, company values were wiped out overnight. Equity values disappeared, companies shut down, people and families felt pain and the economy took a hit. However, it was over in a relatively short period of time.

The industry this is hitting the hardest is slowing down the bleeding even more. The financial institutions provide and source the capital for all other industries. Each day they are operating in a weakened state, other businesses and individuals aren’t getting the financings or financing terms that a fully functioning free market would provide.

When will the market recover and economic expansion resume? When the financial sector reaches a catharsis resulting from both the final write down and the replenishment of tangible assets on their balance sheets. Don’t hold your breath.