Crunch Time: Credit Woes Still Threaten Economy

Fed may need to cut deeply to help cure lending problems.


There are a few Wall Street pros that I keep a close eye on, and when they get worried about the economy, I tend to get a bit skittish as well. Ed Yardeni of Oak Associates seems very worried this morning. Here is a bit of what the crack strategist is telling his clients today:

I hope the folks at the Fed are keeping on top of the rapidly deteriorating financial news. If they are, then another "emergengy" cut in the federal fund rate of 100bps is likely either at the next FOMC meeting on March 18, or before then. The sooner, the better because the emergency isn't over. The news is getting grimmer by the day....

(1) The Nightmare on Wall Street, particularly in the CDO market, just won't go away. On January 30, S&P downgraded, or placed on review, more than 8,000 bonds and CDOs that could double losses in these securities to $265 billion.

(2) S&P LCD estimates that the banks may be stuck with $148 billion of LBO loans that are trading at significant discounts because they can't be syndicated or placed in CLOs. The LBO debt market blew up last week when the banks failed to syndicate $14 billion of Harrah's debt. That jeopardizes the $15 billion of debt for the buy-out of Clear Channel.

(3) The commercial real estate market is getting hit by a severe credit crunch according to the Fed's latest survey of senior loan officers, which showed 80% of domestic banks tightened lending standards on commercial real estate loans in the past three months—the highest level since the question was first asked in 1990. In January, no commercial mortgage-backed securities were issued. That's the first time that's happened since October 1990!

Despite all of the above, I am still willing to give Fed easing a chance—one last chance. I hope that the Fed doesn't wait until March 18 to cut the federal funds rate. I think another emergency cut in the federal funds rate down to 2% is warranted by the rapidly deteriorating credit market conditions.