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Telegraph: Credit Market Crisis Goverment's Fault

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http://www.telegraph.co.uk/money/main.jhtm...C-mostviewedbox

Credit crunch will 'shred investment portfolios to ribbons'
By Ambrose Evans-Pritchard
Last Updated: 2:07am BST 04/07/2007
The near collapse of two Bear Stearns hedge funds has lifted the rock on our 21st century mutant capitalism, exposing the bugs beneath to a rare shock of naked light.
When creditors led by Merrill Lynch forced a fire-sale of assets, they inadvertently revealed that up to
$2 trillion of debt linked to the crumbling US sub-prime and "Alt A" property market was falsely priced on books
.
..../
"This is the big one: all investment portfolios will be shredded to ribbons," said Albert Edwards, from Dresdner Kleinwort.
..../
The deeper reason is the ultra-loose policy of the world's central banks over a decade. They "fixed" the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006. Belated tightening has yet to catch up.
Don't blame capitalism.
This is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us.
As the BIS notes tartly in its warning on the nexus of excess, this blunder has official fingerprints all over it. "Behind each set of concerns lurks the common factor of highly accommodating financial conditions" it said.
...../
If you think we are too clever now to let a full-blown slump occur, read the BIS report.
"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and south-east Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived," it said.
The subtext is that you bake slumps into the pie when you let credit booms run wild. You can put off the day of reckoning, as the Fed did in 2003, but not forever, and not without other costs.
So the oldest and most venerable global watchdog is worried enough to evoke the dangers of depression.
It will not happen. Fed chief Ben Bernanke made his name studying depressions. He will slash rates to zero if necessary, and then - in his own words - drop cash from helicopters. But his solution is somebody else's dollar crisis.
On it goes. Perhaps governments should simply stop trying to rig the price of money in the first place.

I met with a friend last night who is a consultant for one of the big high street banks. he said the hedge fund crisis has depression written all over it. The house market is basically dead in the water as it relies on loose credit. Loose credit just ended---abruptly.

I am afraid we are headed into a storm that will lay more to waste than just house prices.

Al Greenspan's policies were mirrored by our own miracle maker: Gordon Brown. His legacy and Al's will live in infamy.

ST US treasuries anyone?

Edited by Realistbear

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http://www.telegraph.co.uk/money/main.jhtm...C-mostviewedbox
Credit crunch will 'shred investment portfolios to ribbons'
By Ambrose Evans-Pritchard
Last Updated: 2:07am BST 04/07/2007
The near collapse of two Bear Stearns hedge funds has lifted the rock on our 21st century mutant capitalism, exposing the bugs beneath to a rare shock of naked light.
When creditors led by Merrill Lynch forced a fire-sale of assets, they inadvertently revealed that up to
$2 trillion of debt linked to the crumbling US sub-prime and "Alt A" property market was falsely priced on books
.
..../
"This is the big one: all investment portfolios will be shredded to ribbons," said Albert Edwards, from Dresdner Kleinwort.
..../
The deeper reason is the ultra-loose policy of the world's central banks over a decade. They "fixed" the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006. Belated tightening has yet to catch up.
Don't blame capitalism.
This is a 100pc-proof government-created monster. Bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us.
As the BIS notes tartly in its warning on the nexus of excess, this blunder has official fingerprints all over it. "Behind each set of concerns lurks the common factor of highly accommodating financial conditions" it said.
...../
If you think we are too clever now to let a full-blown slump occur, read the BIS report.
"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and south-east Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived," it said.
The subtext is that you bake slumps into the pie when you let credit booms run wild. You can put off the day of reckoning, as the Fed did in 2003, but not forever, and not without other costs.
So the oldest and most venerable global watchdog is worried enough to evoke the dangers of depression.
It will not happen. Fed chief Ben Bernanke made his name studying depressions. He will slash rates to zero if necessary, and then - in his own words - drop cash from helicopters. But his solution is somebody else's dollar crisis.
On it goes. Perhaps governments should simply stop trying to rig the price of money in the first place.

I met with a friend last night who is a consultant for one of the big high street banks. he said the hedge fund crisis has depression written all over it. The house market is basically dead in the water as it relies on loose credit. Loose credit just ended---abruptly.

I am afraid we are headed into a storm that will lay more to waste than just house prices.

Al Greenspan's policies were mirrored by our own miracle maker: Gordon Brown. His legacy and Al's will live in infamy.

ST US treasuries anyone?

Short Short Short Yay.

Mark.

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"This is the big one: all investment portfolios will be shredded to ribbons," said Albert Edwards, from Dresdner Kleinwort.

The deeper reason is the ultra-loose policy of the world's central banks over a decade. They "fixed" the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006. Belated tightening has yet to catch up.

Realistbear - what a happy soul you are. I absolutley agree though!

I note that the stock market appears to have shrugged off its recent worries about subprime and the takeover boom based on loose credit is now back on with the Boots deal going through and Blackstone buying Hilton for $26 billion.

This year is turning out to be a lot like the period before the 1929 and 2000 crashes, several periods of instability and small slumps followed by strong rallies where investors appeared to regain confidence and ignored the warning signs. These short rallies are a good opportunity to sell out more of my portfolio though and I am planning to take maximum advantage. I know I am going to miss the top but when it falls I fear that it wil be impossible to liquidate any position.

Anyone else agree/disagree?

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Realistbear - what a happy soul you are. I absolutley agree though!

I note that the stock market appears to have shrugged off its recent worries about subprime and the takeover boom based on loose credit is now back on with the Boots deal going through and Blackstone buying Hilton for $26 billion.

This year is turning out to be a lot like the period before the 1929 and 2000 crashes, several periods of instability and small slumps followed by strong rallies where investors appeared to regain confidence and ignored the warning signs. These short rallies are a good opportunity to sell out more of my portfolio though and I am planning to take maximum advantage. I know I am going to miss the top but when it falls I fear that it wil be impossible to liquidate any position.

Anyone else agree/disagree?

Yes, sobering indeed.

I feel the top in the SM is very near but perhaps not until later in the Autumn. It just deopends how much longer "they" can keep a lid on the "missing" money to back up all the recent trades in the vartious creative investment vehicles that were invented due to IR policy and poor returns on good old solid savings.

IMO Gordon has been keeping IR acccomodative here for some time and even at 5.75% they are behind the curve. I think there is a decent chnace that Brown will stand pat tomorrow as his muppets must be acutely aware of the greater threat to the world economy when the poisons connected with the credit markets begin hatching out in a more visible fashion. We are seeing tightening credit begin and this will remove pressure on Gordon to hike. I believ it is why Ben is standing pat with a finger hovering on the cut botton which has been driving the dollar down and the pound up--that could all chnage if the currency traders see Gordon is going to follow Ben--which he will be forced to do very soon.

As of now I am about 80% cash with most of it in US$ which I consider a far safer bet than sterling long term (long term that is--sterling is in a bubble IMO and dependent on a negative for its "value", i.e. inflation). 20% in very conservative balanced mutual funds (60:40 value stocks:bonds) with a strong international weighting (Canada in particular due to their natural resources) to hedge currency fluctuations. I have set sell triggers on my stock funds at 5% below current value so I am hoping we don't get a larger than 5% drop in a single day!

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Yes, sobering indeed.

I feel the top in the SM is very near but perhaps not until later in the Autumn. It just deopends how much longer "they" can keep a lid on the "missing" money to back up all the recent trades in the vartious creative investment vehicles that were invented due to IR policy and poor returns on good old solid savings.

IMO Gordon has been keeping IR acccomodative here for some time and even at 5.75% they are behind the curve. I think there is a decent chnace that Brown will stand pat tomorrow as his muppets must be acutely aware of the greater threat to the world economy when the poisons connected with the credit markets begin hatching out in a more visible fashion. We are seeing tightening credit begin and this will remove pressure on Gordon to hike. I believ it is why Ben is standing pat with a finger hovering on the cut botton which has been driving the dollar down and the pound up--that could all chnage if the currency traders see Gordon is going to follow Ben--which he will be forced to do very soon.

As of now I am about 80% cash with most of it in US$ which I consider a far safer bet than sterling long term (long term that is--sterling is in a bubble IMO and dependent on a negative for its "value", i.e. inflation). 20% in very conservative balanced mutual funds (60:40 value stocks:bonds) with a strong international weighting (Canada in particular due to their natural resources) to hedge currency fluctuations. I have set sell triggers on my stock funds at 5% below current value so I am hoping we don't get a larger than 5% drop in a single day!

So RB, you seem to agree that if Bernanke cuts rates the dollar will be toast ?

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Oh dear..

"Mortgage lender Halifax said house prices rose 0.4 percent in June, taking the annual three-month rate to 10.7 percent."

Thats the first time I've seen an 'annual three-month rate' used. I would have thought it makes more sense to say that that is 4.8% annualised. What's the RPI again?

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It was our Government and the US that refused to look at more controls on hedge funds. http://business.guardian.co.uk/story/0,,2083209,00.html

When it comes to controlling the casino of the super rich, our Govt adopts the pose of a hedgehog dazzled by the headlights of international finance. Now its too late. The monster has been created, and when it comes crashing down what will it take with it ?

Who is left holding the debt when the music stops ?

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They're not actually lliterally hatching out are they? More metaphorically?!

RB has a room in his house known as "the hatchery". He dug the floor up so it is just mud now. The room is lit with candles and a Gregorian chant plays in the background. The walls are lined with African withchdoctor artefacts and vials of blood collected from the corpses of the dead ancestors of the houses of Morgan and Rothschild. An old crone in the corner peers out from beneath her ragged cloak, points her staff at the mud and in a blood-curdling voice squawks:

"THE POISONS, THE POOOOIIIIISSSONS are HATCHING!"

if his landlord finds out about this, his deposit is toast. :P

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"Mortgage lender Halifax said house prices rose 0.4 percent in June, taking the annual three-month rate to 10.7 percent."

Thats the first time I've seen an 'annual three-month rate' used. I would have thought it makes more sense to say that that is 4.8% annualised. What's the RPI again?

Not really as the month by month figure can be quite volatile. Plus it doesn't take a mathmatician to work out the annual rate based on one month - more interesting to give an idea of the trend over a few months.

Sadly still going the wrong way though whichever way you spin it.

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So RB, you seem to agree that if Bernanke cuts rates the dollar will be toast ?

If Gentle Ben cuts it will be to head off a world recession/depression. We are in the same boat as the US having followed the same credit loosening policies of the past 10 years that will be forever etched in our minds as the "miracle years" where house prices became reality and debt illusion.

The pound stands or falls on the rate of inflation. Right now it is rising because inflation is rising. It is a terrible place to be. Rising on a negative will not last for long.

When the crunch comes those nations who are the most dependent on credit will suffer the most. According to the recent external debt figures for the world's largest economies, the UK is head of the leaugue on a per capita basis. This is why we are a miracle economy. We have the world's highest house prices because we have the world's highest debt. Not a good fundamental for anyone's currency in the long term.

If the US is in trouble we are in double trouble. Their HPI over the past 5 years has averaged around 20% or so. Our HPI for the miracle years is around 300%. It doesn't take a genius....................

BTW, the UK relies on a competitive exchange rate to do business.*

_____________________

* http://www.businesslink.gov.uk/bdotg/actio...icId=1077683008

The US is the largest economy in the world and the UK's largest trading partner.
Edited by Realistbear

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Current BoE figures show lenders are allowing £50,000,000,000 pa of MEW. That is an awful lot of money which will disappear from the economy when house prices start dipping and lenders decide MEW (or as the BoE now prefers to call it HEW) is no longer prudent from their perspective.

I predict MEW/HEW will be less than £2,000,000,000 a quarter, by 2008 Q3

http://www.bankofengland.co.uk/statistics/...7/mar/index.htm

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