Every day I seem to read an article about how there is an explosion of global credit. Certainly asset markets suggest that this is happening. There are many culprits. Hedge funds, to whom banks are falling over themselves to lend, private equity players, who are similarly flooded with savers' capital, every public and private company. Anthony Boulton is complaining that lending can now avoid the sorts of covenants that previously protected the lenders' interests.
A few articles have explained that although a lot of the individuals who make lending decisions are very unhappy about the lending situation. Perverse incentives rear their ugly head: individuals' bonuses are linked to fees earned from lending large sums. These fees are not returnable if the loan goes bad. The financial system has never solved this agency problem.
My own take on this situation is that asset markets will continue to levitate until there is some spectacular collapse. My own plan is to stay long and hope to bale out quickly enough. Wish me luck!
References
- The Agency Problem
- Martin Wolf's article on why banks are chronically prone to collapses (possibly available here without having to pay a subscription.
