Oct 22 2007
Markets wobble
Led by Wall Street world share markets have fallen recently as investors have worried about how the "repricing of risk" will be completed and what kind of a deal the US has in mind to sort out the poor performing loans.
On October 15th I wrote about the dangers of trying to repackage sub prime loans if it revealed big losses for banks and coincided with more liquidity difficulties in the market. The idea of trying to quantify the risks and find more stable owners of the loans has in the short term caused more worry than relief, as it has highlighted the scale of the problem without yet enabling analysts to decide which banks have lost what sums. It will only work if it can be completed in a credible way, and establish a new level for the value of the debt which enables a market to operate and leaves banks with strong enough balance sheets.
We are still in a tricky transitional period when markets will be very volatile as bulls and bears fight over the fate of sub prime lending.
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John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
The news that commodities are struggling is a sure sign that there will be an economic downturn stateside. Interesting that experts are now talking about a hidden recession in the USA. Those who naively believe the sub-prime crisis has been dealt with are in for a rude awakening. The reality is that cash-flow has been severely interupted and the knock-on effects will continue to be felt.
Reply: Yes, latest prices indicate substantial losses on sub prime, having an impact on the banking systems ability to lend more.
I think that any repackaging of debt, in an attempt to draw a line under the sub prime issue, needs to be done very carefully. It carries the very same inherent risk of generating even more paper with obfuscated debtor quality.
Everyone wants a soft landing engineered, but it may not be possible. If central banks just turn the taps on, inflation can’t continue to be treated as a side issue, NR has hoovered up far beyond the original 10bn ceiling suggested. I know you think inflation demons of the past have been vanquished but all I can see is rising costs.