The Liquidity Issue.

BCbuds sent in this commentary from the Wall Street Journal about the risk present in loose credit markets:

In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a "C." So far this year, that figure is at 33%. No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower.

Led by private equity, borrowers have rushed to avail themselves of seemingly unlimited cheap credit. From a then-record $300 billion in 2005, new leveraged loans reached $500 billion last year and are pacing toward another quantum leap in 2007.

Even leading buyers of loans, such as Larry Fink, chief executive of BlackRock, say "we're seeing the same thing in the credit markets" that set the stage for the fall of the subprime loan market.

That article will only be available to non-subscribers for a few days, but there are articles popping up all over on the same issue. Here's one in the Globe and Mail:

"One of the biggest risks is the potential for a shift in liquidity," Royal Bank of Canada president and chief executive officer Gordon Nixon said at the conference's plenary session.

The furious pace in the growth of financial assets around the world - owing in no small part to the explosion of hedge funds and private equity - raises the risk that, for example, a sudden rise in interest rates could lead to the reduction or even the drying up of that liquidity, he said.

A tightening of credit and a drying up of liquidity would have an impact on all markets, from stocks to real estate. Is this really something to worry about, or are these voices just crying 'wolf'?