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Work and prosperity
13 May 2012

The next financial crisis is already in the making

The Credit Crunch is old hat. The Eurozone debacle is still current, but dragging on a bit. So, how about a new and exciting financial crisis?

No? Well, too bad, because as Izabella Kaminska explains on the FT’s Alphaville blog, those ever-inventive chaps in red braces may have come up with a fresh and original way of wrecking the economy – which is to use trading in commodities to unleash a new wave of sub-prime lending:

  • “The logic is simple. If by leveraging housing stock — using the stock as collateral — the process of mortgage securitisation encouraged subprime lending to people who (arguably) couldn’t afford them, could leveraging commodities in the same way be encouraging equally uncouth lending practices?”

How might this work? Well, finance has always been available to manufacturers to purchase raw materials. The value of stockpiled commodities provides the collateral for the loan, which is typically repaid from profits generated by turning raw materials into higher value products. All well and good.

But what if such businesses were persuaded to stockpile beyond their industrial needs just to get hold of more credit, which would then be used to speculate in commodities instead of using them productively?

  •  “It’s a process which arguably artificially pumps up demand for the underlying inventory. Bundle all those loans together, meanwhile — ideally into a product that can be sold to buyside investors seeking exposure to  commodities — and suddenly you’ve got a direct source of funding for an ever-more speculative game.”

Raising doubts about this sort of thing is, of course, nothing but undiluted Communism. There is, surely, no need to worry about such trifles as the sudden expansion of credit, the above-trend growth of asset prices or the proliferation of highly complicated (but extensively traded) financial instruments.

After all, what could possibly go wrong?


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