The State of the Credit Crunch

It is still a huge drag on the economy.

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Economist Mike Darda gives us the bad news onthe credit markets:

1) Although short-term funding spreads have come sharply off their worst levels, they remain 3-4 standard deviations abovenormal.

2) High yield and investment grade spreads remain at (or close to) record highs.

3)The Fed’s Beige Book for November-December suggested lending standards remain tight as a drum.

4)Credit markets should be in better shape a year from now, but it’s likely to be a long, slow, sloppy slog to normalcy.

Indeed, the de-leveraging process may still have a way to go, especially considering that household debt loads (and debt service ratios) remain high, home prices remain rich relative to rents, and household savings rates are probably only 25% of the way through a significant upward correction given the recent re-pricing of risk.