Something is happening in the credit markets...

(Note: this text was written Tuesday. For a more polemical take written this Thursday, taking into account the most recent developments of the day (including the unprecedented $130 bn liquidity injection by the European Central Bank) you can go read this new story on European Tribune.)

on the front page of the Financial Times, 7 August

The above is the price of corporate loans in the secondary market - i.e. on the market where banks trade IOUs from corporations. If you have a contract that says that a company owes you 100, you can usually sell it (to other banks or financial investors) for 100 or thereabout - a bit more if the buyer thinks the interest rate on the loan is really good, or a bit less if it thinks the interest rate is not quite enough to cover the risk that the company might go bankrupt before paying its debt back.

As you can see above, the price of an IOU of 100 dropped brutally this month from 100 to 95 in the US (and to 97 in Europe). This is the lowest level ever for that market, and an unprecedented drop.

This is a credit crunch.

This post is not directly about energy, but it is about one of the other big imbalances of our times - the giant financial bubble that has been inflating for the past few years, on the heels of the prevous bubble, the now-infamous dotcom bubble. It is about how society can be blind to trends that are obvious to many - including amongst those that are in a position to act and should know better than to do nothing.

I'm on record saying (repeatedly) that we have a huge, unsustainable asset price bubble, and that banks are doing insane things right now. And those of you that have read me previously may remember my quip that a good banker is not one who is right, it is one who is wrong at the same time as the other bankers (and thus bankers right now have no incentive not to participate to the increasingly aggressive deals one can see around).

The scariest thing is that a large number of senior bankers are aware of what I'm saying, are on the same line - and are doing nothing about it.

A headache awaits when the credit party fizzles out

A few days ago in London, a senior banker made a striking admission to me: in his long career, he had almost never seen such bubble-like conditions in the credit markets as exist now. “Perhaps back in the 1980s – just before the collapse,” he muttered, with a despairing chuckle, over an elegant (and expensive) lunch.

That is alarming stuff. But worse is to follow: this very same banker makes a living by arranging loans and bonds to risky companies – and he freely admits there is little chance that his institution is about to switch off this financial tap.