A few hopeful stock gains and welcome company announcements don't add up to a credit turnaround. Nevertheless, there are reasons to think the problem is closer to its end than to its beginning.
The key to understanding how the credit crunch might fade away is to ignore the confusing morass of information about subprime mortgages and creative financing. It will just give you a headache.
It's enough to know that when the subprime mess started to come apart, lenders could no longer tell what their loans were worth. Companies that bought the loans were in the same boat. Nor did anybody know how many of the loans they had would be repaid.
Lenders and buyers reacted by saying, 'Nobody will get more money until the uncertainties end.' Bank vaults slammed shut, and everybody from mom & pop contractors to multinational corporations couldn't get the funds they needed. Naturally, the economy started to weaken and the stock market sank.
Now, here's the good news. Despite the losses, most lenders have plenty of cash available. In addition, the Fed will loan banks all the money they need, and at very attractive rates. Once lenders feel confident enough to lend money again, we will see capital move back into the economy. It's another reason we feel that a rebound –when it comes— may be stronger than expected.