Thursday, September 18, 2008

Diamond and Kashyap from GSB on the current market

There is an interesting piece at the Freakonomics blog, where Doug Diamond and Anil Kashyap from the GSB give us a rundown on the current turmoil in the financial sector. They talk about why Lehman had to fail, Freddie and Fannie had to be rescued, AIG and the bleak scenario going forward for the fin service sectors.

A part of this post for the utter layman goes like this:

I do not work at Lehman or A.I.G. and do not own much stock; why should I care?

The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding.

As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.

Yesterday a friend of mine with a spotless credit record, super high credit score was denied a car lease, on the grounds that his credit history was not "sufficient for him to lease a second car when he already has one", his is a 150k income household.

Interesting times ahead.