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Global markets left reeling
David Teather, Ashley Seager and Justin McCurry, Guardian Unlimited
There were further heavy losses on the world’s financial markets today despite central banks stepping in with massive injections of cash for a second day running in the hope of restoring a sense of calm.
Billions of pounds were wiped off share values as stock markets in Europe, the US and Asia fell sharply. The FTSE 100 index in London saw £63bn wiped off leading shares as it closed 3.7% lower, losing 232.9 points to end the week on 6,038.3. It was the biggest one-day percentage drop in the City in almost four-and-a-half years and wiped out all of the gains made by the FTSE this year.
…The panic gripping investors has been building over several months, since problems first began to appear in the segment of the US mortgage market aimed at people on low incomes or with poor credit histories, the so called sub-prime market.
As interest rates have risen, so the numbers of people defaulting on those loans has gained pace and, due to the way debt is packaged up and sold on to other banks, the effects are now being felt throughout the financial system.
The complexity of the financial markets has only added to the sense of dread as investors have no idea which institutions own what debt, leaving the markets to be riven by rumour and counter-rumour.
(10 August 2007)
Very Scary Things
Paul Krugman, New York Times
…What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time – in particular, financial instruments backed by home mortgages – have shut down because there are no buyers.
This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.
The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania. The housing bubble was only part of it; across the board, people began acting as if risk had disappeared.
(10 August 2007)
The original at the New York Times is behind a paywall. The text is posted at Common Dreams
Credit markets: ‘Don’t panic’, they beg
Jerome a Paris, The Oil Drum
Something is happening in the credit markets…
The [figure at left] is the price of corporate loans in the secondary market – i.e. on the market where banks trade IOUs from corporations. If you have a contract that says that a company owes you 100, you can usually sell it (to other banks or financial investors) for 100 or thereabout – a bit more if the buyer thinks the interest rate on the loan is really good, or a bit less if it thinks the interest rate is not quite enough to cover the risk that the company might go bankrupt before paying its debt back.
As you can see above, the price of an IOU of 100 dropped brutally this month from 100 to 95 in the US (and to 97 in Europe). This is the lowest level ever for that market, and an unprecedented drop.
This is a credit crunch.
(7 August 2007)
Also at
European Tribune and
Daily Kos.
TOD-Canada News Round-Up – Aug 10
Stoneleigh, The Oil Drum: Canada
Yesterday’s financial convulsion is arguably the beginning of the end for a credit expansion of epic proportions that has underlain the economic boom of the last 25 years. It had its roots in the corruption of fractional reserve banking, as directly overseen and facilitated by the Federal Reserve. For those who look to the Fed now for a solution, perhaps it would be advisable to look instead at how the Fed created the current mess.
Fractional reserve banking was designed to provide a controlled credit expansion. However, in the early 1990s, the Fed began to find its rules too restrictve and acted to lower reserve ratios on some deposits and eliminate them for others. In addition, creative accounting implicitly condoned by the Fed allowed banks to circumvent even the limited remaining need to hold reserves. According to the Fed itself (PDF warning, see page 44), by using overnight retail sweep accounts, banks can transfer a proportion of deposits out of the category for which they must hold funds at the Fed (checking deposits), and use them to invest in interest-earning assets.
The lowering of reserve ratios and the acceptance of sweeps by the Fed over a period of many years demonstrates its attitude towards the need for reserves in the first place. How can the Fed claim to be concerned about the unsustainable expansion of the money supply (ie inflation), via the creation of essentially limitless amounts of credit, when it has been fully aware of the corruption of US fractional reserve banking all along? And how can the Fed be unaware of the eventual consequence of uncontrolled credit expansion – a debt crunch – when it has played out many times before?
(10 August 2007)
The round-up is heavy on financial news today.
