Saturday, Mar 10, 2007
Lowering Intererest Rats
MoneyWeek: How (not) to fix a Housing Crash
Containing the subprime collapse, in short, might take more than simply talking down the risk before a Treasury committee. And looking for research on how to fix the US real estate market, Dr.Bernanke could do worse than ask his friend (and fellow academic) Mervyn King at the Bank of England to show him what happened the last time British house prices collapsed.
Cheap money makes real estate look cheap on the monthly repayments. The extra demand it unleashes then pushes the total price higher – and to keep the bubble inflating, new ways of making cheap money look cheaper have to be created.
Posted by sirgoogle @ 06:48 PM (159 views) Add Comment
5 Comments
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1. sirgoogle said...
Nice find this one (published yesterday). Explains a bit on the mechanics of how risk is passed between inventment banks. Paraphrasing from the article .....:
.............Mentions that the risks from mortgages only gets spread around - and this is why investment bankers so nervous about their own debt. Both Wall Street and the City of London earned record sums in the last 12 months. But at the top of the credit cycle – and with global asset values tumbling as the flood of easy money dries up thanks to rising rates in Japan, higher real rates in the US, and the threat of rising rates in Switzerland – the biggest security firms are starting to look awfully insecure.
In the United Kingdom, 125% mortgages lent at 7 times income for 50 years were packaged and sold – to house-hungry consumers now struggling to make interest-only payments each month. Then the City of London bundled that risk along with yet more subprime debt and sold it again – wholesale – to pension and insurance funds. Trouble is, the investment banks also kept back a little of these asset-backed insecurities for themselves, too. For some banks is significant e.g. 13% of a firm's total "tangible equity".
Now the air's gushing out of the subprime market, there's only way Bernanke can plug his finger in the hole and stem the defaults - to lower base interest rates...........
BUT. Choosing that path would prove a disaster for the Dollar, and raise the HPI again - to a peak that if IRs have to continue to fall - will provide zero room for manouvre and then a real recession (and an economically driven HPC).
Looks like IRs will have to hold or rise for the short to medium term - not go down. Which means static House prices or a debt driven HPC.
2. sirgoogle said...
Sorry just looked at the title - very illiterate of me.... I had not finished typing before I published
3. sold 2 rent 1 said...
sirgoogle,
"Choosing that path would prove a disaster for the Dollar, and raise the HPI again - to a peak that if IRs have to continue to fall - will provide zero room for manouvre and then a real recession (and an economically driven HPC)."
Your theory sounds good.
If it comes true then HPC in the US could be 2 years away.
4. tyrellcorporation said...
Sirgoogle. Exactly the paragraph I was going to pick out. This is a real eye-opener and all the housing bulls/trolls that add to this blog need to read this to get a more balanced overview of what is happening underneath the gloss. The knock on effect on all the other large finincial sectors (pensions, etc) will be profound if this smoke-and-mirrors financial wizardry starts to unwind.
5. dohousescrashinthewoods said...
I have shares in Standard life, which took a tumble with the markets and haven't quite recovered. I imagine they are haolding a bunch of this hot air.