Saturday, March 17, 2007

Overheated House Prices are merely one symptom of a larger malaise: irresponsible monetarism

Why the subprime bust will spread

This practice of borrowing short-term at low interest rates to lend long-term at higher interest rates, known as "carry trade" in bank parlance, when globalized by deregulated cross-border flow of funds eventually led to the Asian financial crisis of 1997, when interest-rate and exchange-rate volatility became the new paradigm. Today, there are undeniable signs that the same interest-rate risks have infested the US housing bubble in recent years. And the Fed's traditional gradualism, now revived as "measured pace" in raising the Fed Funds Rate targets in response to rapid asset-price inflation, has had little effect in curbing bank lending to fund rampant speculation.

Posted by lvmreader @ 11:45 PM (496 views)
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4 thoughts on “Overheated House Prices are merely one symptom of a larger malaise: irresponsible monetarism

  • “There is no more money”

    The bank of Mum&Dad and every other bank needs to tighten their lending standards and rates before they go bust.

    I did see worrying comment that the banks were already reducing their fixed lending rates as the rates market anticipates a “peak”. Not entirely unexpected from this group of individuals i guess.

    They probably think they have sold off the risk into the market, then to insurers and reinsurers. Small problem; what happens when the reinsurer defaults. You are ALWAYS carrying credit risk.

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  • Some interesting points in this article including a mention by Greenspan that denied the existence of a housing bubble due to the US housing market being “disaggregated by location” which reduced “contagion.” Can the same be true of the UK housing market?

    Also pension funds likely to suffer further in a crash if they bought into “mortgage backed securitization.”

    “A homeowner whose house has increased 300% in market price while his income has risen only 30% has not become richer. He has become a victim of uneven inflation. He may enjoy a one-time joyride with cash-out financing with a new mortgage, but his income cannot sustain the new mortgage payments if interest rates rise, and he will lose his home. And interest rates will rise if his income increases,”

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  • Brilliant and highly informed article.

    In a nutshell, the financial services industry have tapped into our pension savings and used them to inflate demand for our houses. They had their fees and are away, while we face a double whammy correction:- the loss of equity in our houses and a drop in the value of the bonds held in our pensions, due to rising defaults and falling property prices.

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  • @Royston

    Now you know what Whitewater was about………………

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