Fed ups the ante but market calls
December 18th, 2007Its like watching a disaster movie in slow motion. To see the Fed so far on the back foot is disconcerting to say the least. The recent $40bln credit injection has just left the market needing more and stocks floundering.
For the first time I am asking myself whether we have a Japan style bank crisis developing. My immediate response is to say no because we haven’t had the screaming bubble of the equivalence they experienced in Japan but one could look back to the bubble of 2000/2001 and feel it was merely reinflated by the post 9/11 easing. This easing further invigorated the property bubble and took it to new heights along with financial practices that were dubious at best.
We have a situation where the banking system, in the wider sense, is stuck with a serious number of non-performing loans and this number could easily escalate if the recent liquidity measures don’t work. In Japan the policy response was to duck it and hope it would go away. The US has addressed it head on so far but will they allow banks to go under and house prices to tumble further. The maintenance of confidence is crucial in any fractional reserve fiat based money system and so far it seems like the US authorities are no taking any chances.
What if this doesn’t work? Then we will have a serious problem and global stock markets will take a 20-30% hit. I’m not making any predictions but cash still works for me.
Tags: central banks, credit crunch, federal reserve, financial crisis, japan, money
December 19th, 2007 at 9:46 am
[...] on the heels of the Fed comes the ECB with a massive Christmas present for the markets in the form of a half a trillion [...]
December 29th, 2007 at 2:33 pm
Lots of “dumb buggers” in the U.S. are really overextended. In fact, the mentality in general is one of paying tommorrow for what one has today. Since the fine folks of the U.S. have made ourselves a passle of slaves in order to have what we “want”, we reap what we sow whether we like it or not when the economy takes a turn south. Life has ups and downs, but you can’t put your head in the clouds and pretend. Yet, that is what most folks here tend to do with virtually no planning. Naturally, maintaining “confidence” in the system is very important. With the lack of character of many of the more recent borrowers from all that easy credit, they are likely to bolt on the debt (bankruptcy or not) and create still larger losses in the market. Better to hold it together with scotch tape than to “let the market down” or allow a drastic correction to take place.
December 30th, 2007 at 3:16 am
Thanks Elvis. What is also interesting is the story coming out about the construction of sub prime derivative products and how those involved systematically put together financial products to take advantage of high risk borrowing. I think there is more to come on that aspect of things.
I remember well the fiasco back in the late 80s, early 90s of local authorities losing fortunes in basic derivative hedges supposedly sold to them as a way of hedging interest rate risk but in fact exposed them to the very same market. Those salespeople involved were exposed and I am sure we will see the same thing happen here.
Where there’s money there’s trouble.
January 9th, 2008 at 4:32 am
[...] know the credit bubble has well and truly burst. We’ve seen it before with Japan but that was really a closed market and the response was non existent thus causing a 15 year [...]
January 23rd, 2008 at 4:25 am
[...] the 20% drop I predicted in December has happened pretty quickly but that’s coming off a big high. We’ve had [...]