finally caught up to the stock market. The American consumer is
underwater, the banks are buried in debt, and the housing market
is in terminal distress. The Dow is now below its 200-Day Moving
Average - the first big "sell" signal. Anything below 12,500 could
trigger program-trading and crash the market. The increased volatility
suggests that we are watching a "real time" meltdown.
Business editor for the UK Telegraph, Ambrose Evans Pritchard,
summed up November 23's action in the Asian markets:
credit crisis has hit Asia with a vengeance for the first time,
triggering a massive flight to safety as investors across the
region pull out of risky assets. Yields on three-month deposits
in China and Korea have plummeted to near 1 per cent in a spectacular
fall over recent days, caused by panic withdrawals from money
market funds and credit derivatives.
is a severe warning sign,' said Hans Redeker, currency chief at
BNP Paribas. 'Asia ignored the credit crunch in August but now
we're seeing the poison beginning to paralyze the whole global
economy.'" (Credit 'Heart attack' engulfs China and Korea," Ambrose
Evans Pritchard, UK Telegraph.)
storm that began in the United States with subprime mortgages
has spread to markets across the globe. In fact, the train has
already crashed. What we're seeing now is the boxcars piling up
on top of each other.
On Nov 20,
Chinese government officials ordered a complete halt to bank lending
to slow the speculative frenzy that has created an enormous equity
bubble in the stock market. According to the Wall Street Journal:
authorities are slamming the brakes on bank lending, in their
latest attempt to curb the runaway investment threatening to overheat
what is soon to be the world's third-largest economy. In recent
weeks, regulators have quietly ordered China's commercial banks
to freeze lending through the end of the year, according to bankers
in several cities. The bankers say that to comply, they are canceling
loans and credit lines with businesses and individuals." ("China
freezes lending to Curb Investing Frenzy," Wall Street Journal.)
illustrates how concerned the Chinese are that a slowdown in US
consumer spending will trigger a crash on the Shanghai stock market.
It also shows that the Chinese are having difficulty dealing with
the inflation generated by the hundreds of billions of US dollars
absorbed via the trade imbalance with the US. China is awash in
USDs and that surplus is causing a steady rise in food and energy
costs. This could be mitigated by allowing their currency to "float"
freely. But a sudden, steep increase in the Chinese yuan's value
could also send the world headlong into a global recession. For
now, the lending freeze and price fixing appear to be the way
that the markets have reached a "tipping point" appeared in a
Reuters article on Nov 21; "Interbank Covered Bond Trading Halted
credit turmoil and volatility led the European Covered Bond Council
(ECBC) on Wednesday to suspend inter-bank market-making in covered
bonds until Monday, Nov. 26.
move is a sign of the stress in the covered bond market, which
is dominated by German institutions that have almost a trillion
euros of covered bonds outstanding.
bonds - backed by pools of assets that remain on the borrower's
balance sheet - are usually highly liquid and typically rated
triple-A by ratings agencies. The ECBC's recommendation is aimed
at relieving the pressure on market makers who are forced to quote
prices at a fixed bid-offer spread.
of the current market situation and in order to avoid undue over-acceleration
in the widening of spreads, the 8-to-8 Market-Makers & Issuers
Committee recommends that inter-bank market-making be suspended,"
the ECBC said in a release."
isn't mortgage-backed junk that's being sold, but highly liquid
bonds that are usually easy to cash in. The ECBC's action is a
sign of pure desperation and indicates that credit paralysis has
infected the entire euro banking system.
global credit crisis has hit Asia with a vengeance for the
first time, triggering a massive flight to safety as investors
across the region pull out of risky assets. Yields on three-month
deposits in China and Korea have plummeted to near 1 per
cent in a spectacular fall over recent days, caused by panic
withdrawals from money market funds and credit derivatives.'
- Ambrose Evans Pritchard
"Due to general market conditions and the specific mechanics of
the inter-dealer market making it even seems possible that inter-dealer
market making will not be resumed this year."
The mechanism for converting covered bonds into cash has broken
took another pasting on Nov 21, sliding to US$1.49 on the euro;
another new record. Gold shot up to $814 per ounce. Oil continues
to flirt with the $100 per barrel mark, and the yen rose to 107
per dollar forcing a sell-off of hedge fund assets levered through
the carry trade.
economist at Credit Suisse, summed it up like this: "There's a
heck of a lot of bad news out there." Indeed.
Governor Arnold Schwarzenegger has joined with four mortgage lenders
to freeze adjustable interest rates (ARMs) for some of the state's
highest-risk borrowers; another unprecedented move. The Governor
hopes to avoid a collapse of the California real estate market
which has gone into a tailspin. Home sales have plummeted more
than 40 per cent for the last two months. Prices have dropped
sharply - roughly 12 per cent statewide. New construction has
slowed to a crawl. Layoffs are steadily rising. Jumbo loans (mortgages
over $417,000) have been put on the "Endangered Species" list.
Even qualified borrowers can't get mortgages. Nothing is selling.
California housing is "off the cliff".
plan to keep over-extended subprime mortgage-holders in their
homes faces an uncertain future. What incentive is there for homeowners
to continue paying exorbitant monthly rates when their payments
are not applied to the principle? The homeowners would be better
off bailing out, accepting foreclosure, and starting over with
a clean slate.
to think that Schwarzenegger can stop the tidal wave of foreclosures
that are sweeping across the state. An estimated three million
homeowners will lose their homes nationwide.
If you want
to blame someone; blame Alan Greenspan. He's the one who created
this mess. According to the economist Mike Shedlock:
caused the credit crunch by slashing interest rates to 1 per cent
to bail out its banking buddies in the wake of a dotcom bubble
collapse. All the Fed did was create a bigger bubble. This bubble
is so big in fact that it cannot even be bailed out. It's the
end of the line for a serially bubble blowing Fed.
only was this the biggest credit bubble in history, this was also
the biggest transfer of wealth from the poor and middle class
to the already enormously wealthy. That is the real travesty of
justice regardless of whether or not the price tag is $1 trillion,
$2 trillion, or $10 trillion." (Mike Shedlock, "Mish's Global
Economic Trend Analysis")
Nov 20, Chinese government officials ordered a complete
halt to bank lending to slow the speculative frenzy that
has created an enormous equity bubble in the stock market.
has gotten so serious that even Secretary of the Treasury, Henry
Paulson, is putting up red flags. Last week, Paulson ignited a
sell-off on Wall Street when he made this statement:
of the problem will be significantly bigger next year because
2006 [mortgages] had lower underwriting standards, no amortization,
and no down payments... We're never going to be able to process
the number of workouts and modifications (to mortgages) that are
going to be necessary doing it just sort of one-off. I've talked
to enough people now to know that there's no way that's going
is palpable. Like Schwarzenegger, Paulson is trying to get mortgage-lenders
to provide a safety net for struggling borrowers who are defaulting
on their loans.
calling for emergency legislation that will allow the Federal
Housing Administration to play a greater role in the relief effort.
The FHA has already expanded its traditional role by taking on
hundreds of billions in extra debt just to keep a few "private"
mortgage lenders and banks from going bankrupt. Of course, when
Paulson's plan goes kaput and the debts pile up; it'll be the
taxpayer that foots the bill.
also called the Senate's failure to pass legislation overhauling
mortgage giants Fannie Mae and Freddie Mac frustrating," saying
that the two government-sponsored entities need to be playing
a bigger role in the housing market.
ever need them it's during times like today, and they're most
valuable when there is distress in the mortgage market," he said.
"I'd like to see them playing an even bigger role." (Wall Street
Freddie have already posted enormous quarterly losses and don't
have the capital reserves to put millions of subprime mortgage-holders
under their "government-sponsored" umbrella. Paulson is just grabbing
credit turmoil and volatility led the European Covered Bond
Council (ECBC) on November 21 to suspend inter-bank market-making
in covered bonds until Monday, November 26. The move is
a sign of the stress in the covered bond market, which is
dominated by German institutions that have almost a trillion
euros of covered bonds outstanding.'
are brewing in the broader market where late-payments and defaults
have spread to credit card debt and new car loans. Every area
of "securitized" debt has suddenly veered off the road and into
the ditch. Last week the Fed injected more credit into the teetering
banking system than anytime since 9-11.
No one has
predicted the downward-spiral in the market more accurately than
Nouriel Roubini. Roubini is a Professor at the Stern School of
Business at New York University. His analysis appears regularly
on his blogsite, Global EconoMonitor. Last week's prediction was
particularly dire and is worth reprinting here:
increasingly clear by now that a severe U.S. recession is inevitable
in next few months... I now see the risk of a severe and worsening
liquidity and credit crunch leading to a generalized meltdown
of the financial system of a severity and magnitude like we have
never observed before.
"In this extreme scenario whose likelihood is increasing
we could see a generalized run on some banks; and runs on a couple
of weaker (non-bank) broker dealers that may go bankrupt with
severe and systemic ripple effects on a mass of highly leveraged
derivative instruments that will lead to a seizure of the derivatives
markets... massive losses on money market funds with a run on
both those sponsored by banks and those not sponsored by banks;
...ever growing defaults and losses ($500 billion plus) in subprime,
near prime and prime mortgages with severe knock-on effect on
the RMBS and CDOs market; massive losses in consumer credit (auto
loans, credit cards); severe problems and losses in commercial
real estate...; the drying up of liquidity and credit in a variety
of asset backed securities putting the entire model of securitization
at risk; runs on hedge funds and other financial institutions
that do not have access to the Fed's lender of last resort support;
a sharp increase in corporate defaults and credit spreads; and
a massive process of re-intermediation into the banking system
of activities that were until now altogether securitized." (Nouriel
Roubini's Global EconoMonitor.)
meltdown of the financial system".
Chicken Little might have gotten it right this time; "The sky
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at [email protected].
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