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Are The Credit Markets Thawing?

The Times collects the evidence that they are: 

The market for securities made from bundles of car loans and student loans — a vital source of credit — has started to stabilize. Prices of these investments have risen in the last month, suggesting government-run programs to buy or guarantee this type of debt are gaining traction. ...

Businesses with better credit ratings issued $200 billion of debt in the first quarter, according to Thomson Reuters, compared with $188 billion a year ago.

Even as credit rating agencies predict high rates of default for 2009 and junk-rated companies like General Growth Properties, the shopping mall owner, struggle to avoid bankruptcy, investors are pushing more money into high-yield debt. Junk bonds just ended their best quarter in five years, and a report by AMG Data Services said that $923 million flowed into junk-bond mutual funds last week, the most since 2005.

On the other hand, the final graf of the piece raises a seemingly important question: Is the activity self-sustaining? If not, when will it become self-sustaining?

“The question to ask is not whether credit markets have improved,” said Jeff Rosenberg, head of credit strategy research at Bank of America/Merrill Lynch. “The question is, what is the source of the improvement? Can credit markets function without significant government intervention? Indisputably, the answer is no.”

Having said that, I'm not convinced this is such a relevant question. The biggest problem with dysfunctional credit markets is that they act as a drag on the economy and prevent a recovery. If government intervention gets them to stop being a drag--even if the markets couldn't function on their own--then the economy has a chance to recover. And if a recovery materializes, the credit market activity presumably will become self-sustaining at that point. So asking whether the credit market activity is currently self-sustaining seems to miss the point of the intervention a bit.

--Noam Scheiber