Don't bet on the credit soufflé rising

[TexasLawyer]

Don't bet on the credit soufflé rising

By Ambrose Evans Pritchard
Last Updated: 12:01am BST 07/09/2007

If you keep no more than a desultory eye on the markets, checking the FTSE-100 or the Dow each morning but little more, you would not be aware that the world financial system had a heart attack over the summer, and is still in emergency care.

The shocking events of August 20 have no parallel in modern capitalism. A panic flight to safety caused the yield on three-month US Treasury notes to plunge at the fastest rate ever recorded, outdoing the 1987 stock market crash and 9/11.

What occurred this time was a near-total breakdown of trust in the $2.2 trillion market for US commercial debt, which lubricates daily business. People with a lot of money were even extracting their funds from bank accounts, suddenly deemed risky. The spill-over is global, as British house buyers will soon discover.

There are layers of complexity behind this: suffice to say that vast purchases of bonds by the central banks of China, Korea, Russia, Thailand, India, Brazil and the petrodollar sheikdoms created a bond bubble, driving down the cost of money through the entire spectrum of global credit.

By early this year, money was growing on trees.

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