"A Generalized Meltdown of Financial Institutions"
Take a Look at Professor Roubini's Crystal Ball
by Mike Whitney
Global Research, November 24, 2007
Information Clearing House
Reality has finally caught up to the stock market. The American consumer is underwater, the banks are buried in debt, and the housing market is in terminal distress. The Dow is now below its 200-Day Moving Average -- the first big "sell" signal. Anything below 12,500 could trigger program-trading and crash the market. The increased volatility suggests that we are watching a "real time" meltdown.
International Business editor for the UK Telegraph, Ambrose Evans Pritchard, summed up yesterday's action in the Asian markets:
The credit storm that began in the United States with subprime mortgages has spread to markets across the globe. In fact, the train has already crashed. What we're seeing now is the boxcars piling up on top of each other.
On Tuesday Chinese government officials ordered a complete halt to bank lending to slow the speculative frenzy that has created an enormous equity bubble in the stock market. According to the Wall Street Journal:
The move illustrates how concerned the Chinese are that a slowdown in US consumer spending will trigger a crash on the Shanghai stock market. It also shows that the Chinese are having difficulty dealing with the inflation generated by the hundreds of billions of US dollars absorbed via the trade imbalance with the US. China is awash in USDs and that surplus is causing a steady rise in food and energy costs. This could be mitigated by allowing their currency to "float" freely. But a sudden, steep increase in the Chinese yuan's value could also send the world headlong into a global recession. For now, the lending freeze and price fixing appear to be the way out.
Another sign that the markets have reached a "tipping point" appeared in a Reuters article on Wednesday; "Interbank Covered Bond Trading Halted on Volatility":
Note: This isn't mortgage-backed junk that's being sold, but highly liquid bonds that are usually easy to cash in. The ECBC's action is a sign of pure desperation and indicates that credit paralysis has infected the entire euro banking system.
Reuters: "Due to general market conditions and the specific mechanics of the inter-dealer market making it even seems possible that inter-dealer market making will not be resumed this year."
That's bad. The mechanism for converting covered bonds into cash has broken down.
The dollar took another pasting on Wednesday, sliding to $1.49 on the euro; another new record. Gold shot up to $814 per ounce. Oil continues to flirt with the $100 per barrel mark, and the yen rose to 107 per dollar forcing a sell-off of hedge fund assets levered through the carry trade.
Jon Basile, economist at Credit Suisse, summed it up like this: "There's a heck of a lot of bad news out there." Indeed.
In California Governor Arnold Schwarzenegger has joined with four mortgage lenders to freeze adjustable interest rates (ARMs) for some of the state's highest-risk borrowers; another unprecedented move. The Governor hopes to avoid a collapse of the California real estate market which has gone into a tailspin. Home sales have plummeted more than 40 per cent for the last two months. Prices have dropped sharply---roughly 12 per cent statewide. New construction has slowed to a crawl. Layoffs are steadily rising. Jumbo loans (mortgages over $417,000) have been put on the "Endangered Species" list. Even qualified borrowers can't get mortgages. Nothing is selling. California housing is "off the cliff".
Schwarzenegger's plan to keep over-extended subprime mortgage-holders in their homes faces an uncertain future. What incentive is there for homeowners to continue paying exorbitant monthly rates when their payments are not applied to the principle? The homeowners would be better off bailing out, accepting foreclosure, and starting over with a clean slate.
It's unrealistic to thinks that Schwarzenegger can stop the tidal wave of foreclosures that are sweeping across the state. An estimated 3 million homeowners will lose their homes nationwide.
If you want to blame someone; blame Alan Greenspan. He's the one who created this mess. According to the economist Mike Shedlock:
The problem has gotten so serious that even Secretary of the Treasury, Henry Paulson, is putting up red flags. Last week, Paulson ignited a sell-off on Wall Street when he made this statement:
The desperation is palpable. Like Schwarzenegger, Paulson is trying to get mortgage-lenders to provide a safety net for struggling borrowers who are defaulting on their loans.
Paulson is calling for emergency legislation that will allow the Federal Housing Administration to play a greater role in the relief effort. The FHA has already expanded its traditional role by taking on hundreds of billions in extra debt just to keep a few "private" mortgage lenders and banks from going bankrupt. Of course, when Paulson's plan goes kaput and the debts pile up; it'll be the taxpayer that foots the bill.
Fannie and Freddie, have already posted enormous quarterly losses and don't have the capital reserves to put millions of subprime mortgage-holders under their "government-sponsored" umbrella. Paulson is just grabbing at straws.
Similar troubles are brewing in the broader market where late-payments and defaults have spread to credit card debt and new car loans. Every area of "securitized" debt has suddenly veered off the road and into the ditch. Last week the Fed injected more credit into the teetering banking system than anytime since 9-11.
No one has predicted the downward-spiral in the market more accurately than Nouriel Roubini. Roubini is a Professor at the Stern School of Business at New York University. His analysis appears regularly on his blogsite, Global EconoMonitor. Last week's prediction was particularly dire and is worth reprinting here:
"A generalized meltdown of the financial system".
Looks like Chicken Little might have gotten it right this time; "The sky IS falling."
Mike Whitney lives in Washington state. He can be reached at: firstname.lastname@example.org
Global Research Articles by Mike Whitney
Monday, November 26, 2007
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