Thursday, September 20, 2007

If you’re “worried” that rate cuts will “solve” the HPC problem…

US Banks Brace for Financial Storm Surge as Dollar Plunge and Credit System Panic

This was posted under a different link at about 11pm last night, but it's only just shown up so I think many may have missed it (there are no comments). This is a MUST READ. Written before the Fed actually cut rates but it all holds true, and for virtually every point made about the US you could just substitue "UK" and it would still be true - the parallels are frightening. HPC full steam ahead whether BoE cuts or not, but whither the economy...

Posted by dugmug @ 02:32 PM (900 views)
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3 thoughts on “If you’re “worried” that rate cuts will “solve” the HPC problem…

  • this is exactly what people on this site have been saying for over a year now

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  • It’s because they don’t have the reserves and because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”, which means they have no discernible market value. They might as well have been “marked to fantasy”,it amounts to the same thing. Investors don’t want them. So Northern Rock is stuck with a $200 billion albatross that’s dragging them under.

    A more powerful tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business model as Northern Rock.

    No, it is your BOE that have a $200bn albatross dragging them under. They are now 5th largest sub prime lender in the UK. It will be interesting to see how many US banks follow the example.

    I wouldn’t have this happening to my economy…..

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  • It’s a long article, these are the points that stood out for me:

    [Northern Rock] had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the U.S. So why can’t they pay out a paltry $4 or $5 billion to their customers without a government bailout? It’s because they don’t have the reserves and because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”, which means they have no discernible market value. They might as well have been “marked to fantasy”, it amounts to the same thing. Investors don’t want them.

    Many of the [US] banks have been engaged in the same practices and are using the same business model as Northern Rock. [But] Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them, whether they’re sub-prime or not. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.

    [An] article chronicled the sudden up-tick in borrowing by the struggling banks via the Fed’s emergency bailout program, the “Discount Window”: “Discount borrowing under the Fed’s primary credit program for banks surged to more than $7.1 billion outstanding as of Wednesday, up from $1 billion a week before. The Fed in its weekly release said average daily borrowing through Wednesday rose to $2.93 billion.” Traditionally, the “Discount Window” has only been used by banks in distress, but the Fed is trying to convince people that it’s really not a sign of distress at all. It’s “a sign of strength”. Baloney. Banks don’t borrow $3 billion unless they need it. They don’t have the reserves. Period.

    Interest rate cuts do not address the underlying problems of insolvency among homeowners, mortgage lenders, hedge funds and (potentially) banks. It’s better to let cash-strapped borrowers default than slash interest rates and trigger a global run on the dollar. Financial analyst Richard Bove says that lower interest rates will do nothing to bring money back into the markets. Instead, lower interest rates will send the dollar into a tailspin and wreak havoc on the job market. (The Fed) cannot reduce fear by stimulating inflation.

    Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6 per cent in the most recent quarter.” That’s 18.4 per cent a year, and yet Bernanke is still considering cutting interest rates and further fueling inflation.

    What about the American worker whose wages have stagnated for the last six years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing.

    The Fed chief’s hands are tied. Bernanke simply doesn’t have the tools to fix the problems before him. Insolvency cannot be fixed with liquidity injections nor can the deeply-rooted “systemic” problems in “structured finance” be corrected by slashing interest rates.

    Rate cuts won’t help to rekindle the spending spree in the housing market either. That charade is over. The banks have already tightened lending standards and inventory is larger than anytime since they began keeping records. The slowdown in housing is irreversible as is the steady decline in real estate prices.

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