Squeeze, crunch or crash? No, it’s a credit crisis

Last summer, amongst journalistic colleagues, there was a debate over how we should describe what then seemed to be a developing story about stresses in the credit markets. In late July these stresses had spilled over into the equity markets, causing the issue to jump to the top of news agendas.

Some people had already started referring to this as the “credit crunch” – a quick and easy piece of alliteration that supposedly helped ease readers into what was pretty technical stuff.

Yet credit crunch was a bit too downmarket for some colleagues – and maybe it was not even accurate. “Crunch” typically denotes something being crushed or ground down. Crunch was onomatopoeic – but the word did not necessarily chime with a lack of liquidity in the commercial paper markets, which had caused localised difficulties with what we were then learning to call structured investment vehicles and other, off-balance sheet variable interest entities.

So there was a move to call this developing story the “credit squeeze” a calm and accurate description of tightening liquidity conditions in the supply of credit to various sections of the financial markets.

That lasted about two days. In actual fact, “credit squeeze” did not reflect the severity of what was going on. This was bigger. This was not just about technical things like credit default swaps or intangible things like liquidity. It was a financial car wreck. This was actually a “CREDIT CRUNCH”.

Last week, the name changed again. Now it’s a crisis – the credit crisis. And I don’t think any colleagues are going to waste time debating that one.

When the Federal Reserve Bank of New York has to offer unlimited sums to support one of Wall Street’s bulge bracket firms, as it has with Bear Stearns, you are in a crisis. When the world’s pre-eminent central bank has to follow that up with a promise “to provide liquidity as necessary to promote the orderly functioning of the financial system” you know you are in a really deep crisis.

We might call it the Great Credit Crash, except that the price of credit is expressed as how much it stands over and above the cheapest official interest rates – so when conditions get tough, the price or “spread” rockets higher. Crash denotes a fall rather than an explosion higher, but then once the West’s equity markets properly wake up to what is happening in credit and accept the fact that Western economies are headed into a deep and painful recession, maybe all the labelling will become academic.