Bill Kay says it really is time to worry

I have purposely avoided using this blog series to peddle my bread and butter material - business, finance and investment. But it's time to break that rule, after going to a conference this week that lifted the lid on just how bad the credit crunch is likely to become - and how long it is likely to last.
In case you want to google it, the conference was called the Distressed Debt West Coast Investor Forum and it was held at the Universal City Hilton on April 1-2. As the name suggests it was about distressed debt - money owed by companies in trouble - and the event was aimed at investors who want to find out how to profit from providing such debt by lending money that may or may not tide over these spluttering businesses.
The speakers were mainly investment banks such as Goldman Sachs and Credit Suisse, as well as lawyers specialising in this area and loan brokers who pull borrowers and lenders together. The investors were largely very wealthy inviduals or their representatives, often worth hundreds of millions of dollars and faced with the perennial problem of where to put all that money to preserve or increase its value. You don't need to shed tears for people in such a predicament. They do like lending, or buying bonds of one sort or another, because it is not as risky as investing in shares. However the safest bonds - US Treasuries or UK gilts - are not paying much interest at the moment. Bonds issued by companies pay more, but there is a risk that they will miss interet payments and may not be able to repay the bonds. So it's a fine calculation as to how these wealthy investors strike the balance between fear and greed, between getting a higher rate of interest or losing their shirt.
I don't want to get too bogged down in the range of choices they face in these tough times. What was most shocking from the point of view of the rest of us was the bankers' and lawyers' confidence that this crisis is going to last not for months but years.
A brief cameo sums up the mood. The after-lunch speaker began his address by saying “I have been asked which (baseball) inning we are in with regard to the credit crisis. I would say we are still in the first…”
A voice in the hall interrupted: “First inning? They’ve only just thrown the first pitch!”
This is in lurid contrast to the guarded words we have been hearing so far from people like Ben Bernanke at the Fed and his UK counterpart, Mervyn King at the Bank of England. Bernanke has at least begun to mention the dreaded word recession, but is still sticking to the prediction that all this nastiness will be over in the summer and the economy will pick up again in the second half of this year as if nothing had happened.
It's even worse if, like me, you read the outpourings of brokers, fund managers and financial advisers. They have been forced to refer to turmoil or difficulties, but only as a buying opportunity so that they can keep their income up.
To some extent they're right. You may not have the contacts or the clout to get into distressed debt, but shares will get very depressed, even in well-run companies, so there will be big profits to be made for those who have spare cash and are brave enough to invest in the next year or so.
But most people aren't in that happy position, which is only a few rungs down from the wealthy fellow wandering what to do with all his money.
As we know, consumer spending has been roaring away as the stores were about to close for ever, and plenty of people have been borrowing like fury to stay in the game. But that is about to stop, so anyone relying on debt to fund their lifestyle is about to suffer a rude shock. It's not so much that interest rates are about to soar - Bernanke has been cutting them in the US for all he's worth - though cut-price deals are coming to an end very rapidly indeed.
No, the real problem is that banks are calling in many of their loans. They don't trust one another, let alone you and me. They also losing billions from loans that are going sour, so they need to pull in as much cash as they can to make up for that.
If you have a loan deal that you are meeting the payments on as scheduled, fine. They won't cut you off. But miss a payment and you could be in big trouble. And as for taking out a fresh loan, forget it unless you have cast-iron collateral.
The broad rule is to pay off your debts as quickly as you can, even if it means living a quieter life. I know that if everyone does this the economy will tank, but that isn't your problem. Just get yourself in healthy shape and be glad you've got a job - if you have, while you have.
This all still takes some getting used to. Less than a year ago, things seemed pretty fine, the odd cloud on the horizon but nothing too ominous. Now, it begins to feel like last autumn was 1929 and we may not start pulling round for another three years or so. That's right. Three years.
And when a downturn lasts that long, it affects everyone's outlook. People go into defensive mode and everything slows down. It recently took Japan ten years to get over a slump, but that had much to do with the Japanese people's pessimism and introspection. What we need now is a reserve of optimistic and extraversion. We are about to find out how deep that reserve is.