Comments on: Is a 100% Credit Freeze in Our Future?

By: Gerard

Gerard — Mon, 27 Oct 2008 00:32:56 +0000

No, that is very unlikely. Effectively what you’re saying is that banks will sacrifice all their income, whilst still paying out interest on deposits!! the only situation that this is possible is where the bank in question is having capital adequacy issues, in which case, all bets are off. However, that would be an individual bank as opposed to a complete freeze which is near impossible… then again, they said house prices would never fall so…..

By: Mike

Mike — Sun, 26 Oct 2008 22:07:20 +0000

“Through a reliable source, I was told that there is a strong potential for a credit freeze come January 2009.”

At “one” bank unlikely, but anything’s possible.

At “all” banks.. no way. Anyway, how could this one source possible know something like that?

By: JLP

JLP — Sun, 26 Oct 2008 18:34:10 +0000

KC,

This particular person was talking about the beginning of the year (2009).

I don’t see this happening, but you never know. That’s why I mentioned it–so that we could discuss the likelihood of it happening.

By: KC

KC — Sun, 26 Oct 2008 15:56:55 +0000

I’d say this is complete hogwash. In fact I just refinanced my home this week and the bank was willing to loan me 10% more than my home was worth. Sounds like not much has changed. Granted we have virtually perfect credit and no debt other than our home, but the bank was willing to offer us more debt than we wanted

Look at Toyota and other car makers (Acura comes to mind) that rarely offer low interest rates on car purchases. Their credit agencies have money to loan (to qualified individuals) and they are offering 0% interest deals. There are also responsible banks and credit unions that have plenty of money to loan (BB&T) – they have always been conservative in their lending practices and will continue to (in others words bring 20% down to the closing!)

By: Kitty

Kitty — Sat, 25 Oct 2008 22:41:30 +0000

JLP – it is possible temporarily because of the current credit crisis but not forever. It is possible with a particular bank because they may be over-leveraged. They may have a lot of outstanding loans, a lot of mortgage-back securities on which they may need to report losses: because of the “mark to market” rule the banks need to report paper losses i.e. loss in market value of securities even if they don’t plan on selling these securities. This bank may need to build up its reserves so that a) they have enough money to pay depositors who want to withdraw b) they don’t report too large of a net loss next quarter. Because of current credit crisis which is still not over the bank may have problems getting interbank loans, so it needs more money to cover if too many people want to withdraw.

It is completely impossible “forever” because all banks will simply go out of business: they cannot keep paying you interest on your deposits unless your deposits are invested into loans and bring them more money.

By: JLP

JLP — Fri, 24 Oct 2008 19:28:25 +0000

Bob,

The source of this rumor was an executive at a bank and the person who relayed this information to me has been a long-time reader of this blog so I don’t know how dumb this rumor is.

I don’t see what this banker had to gain by passing this information on to the AFM reader.

By: Bob

Bob — Fri, 24 Oct 2008 19:23:29 +0000

So absolutely not possible. here is a small example.

credit freeze stops all lending. That means banks cannot or would not foreclose because there would be virtually no one to buy the forclosure, defeating the purpose. So everyone would stop making their payments. Banks wouln’t care because all depositors would withdrawal their money to live on.

This “rumor” is one of the dumbest things I have ever heard. They might freeze gravity next.

By: Mark

Mark — Fri, 24 Oct 2008 19:03:17 +0000

Depends what you mean by “loans”. My wife is traveling overseas tomorrow and I just got off the phone from informing the bank so they won’t block the credit card when she uses it there. They practically begged me to use my card more. Offered to increase my limit, reduce my rate – declined both, I pay off each month, eminded me I have rental car insurance, extended warranty at no charge, blah, blah, blah. Finally, they doubled the cash back for the next 6 months. So are they loaning money? Are they going to stop doing so on 31 December? I think the answersare yes and no respectively. They basically offered my an unsecured loan for more than I care to borrow.

By: Steve Heath

Steve Heath — Fri, 24 Oct 2008 13:23:12 +0000

You know, what jdh wrote makes sense considering where things are, but really, is that how they should be?

No mortgages… the people who have built up savings will buy homes and rent them out to people who haven’t. No auto loans… people will have to save up and buy the car. No credit cards, people will first save and then buy (as do many people right now who only use their credit cards for rewards and pay off the bill every month).

It would be harder for those just starting out, and would reduce demand across the board, probably reducing prices… even businesses who need big loans for factories or equipment could turn to the equities market. It’s not impossible to imagine a good life without bank credit, but it’s getting from here to there that will be wrenching.

By: Kitty

Kitty — Fri, 24 Oct 2008 01:48:04 +0000

If there are no loans how will banks make any money? What will the banks do – take your money, put in a vault then pay you interest at a loss to themselves? Then, they might as well change their title from “bank” to “charitable organization”.

Loans is the way banks make money. In banks’ speak deposits are liabilities and loans are assets. So if banks suddenly stop giving all loans – mortgage, credit card, business, etc. – they’ll have to stop paying you interest. Then you’ll not want to deposit your money or will want to take your money away. Then the bank may just have to close because it probably doesn’t have money in reserve to pay the depositors anyway since it cannot just take back all existing loans at a moment’s notice.

A particular bank the article refers to must be in real trouble. It probably over-leveraged and wants to increase its reserves to meet its obligations. So it has to stop lending for a while until it has enough in reserve to protect itself from further losses.